Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2007 ONFSCDRS 106
FSCO A05-000327

BETWEEN:

LINTON HUTCHINSON
Applicant

and

SECURITY NATIONAL INSURANCE CO./ MONNEX INSURANCE MGMT. INC.
Insurer

REASONS FOR DECISION

Before: Richard Feldman
Heard: June 19, 20, 21, 2006 and February 26, 2007, at the offices of the Financial Services Commission of Ontario in Toronto.
Appearances:
David S. Wilson for Mr. Hutchinson
Donald Harvey for Security National Insurance Co./Monnex Insurance Mgmt. Inc.

Background:

The Applicant, Linton Hutchinson, was injured in a motor vehicle accident on August 23, 2002. He applied for and received statutory accident benefits from Security National Insurance Co./Monnex Insurance Mgmt. Inc. ("Security National"), payable under the Schedule.¹ Disputes arose between the parties concerning Mr. Hutchinson's entitlement to certain benefits. The parties were unable to resolve their disputes through mediation and, in December 2003, Mr. Hutchinson applied for arbitration at the Financial Services Commission of Ontario (File No. A03-001712) under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

On July 19, 2004, the date upon which the hearing of that matter was to commence, the parties reached a settlement whereby they jointly requested that the Commission issue an order in accordance with the signed Consent of the parties, filed with the Commission. That consent order in file number A03-001712 was issued by Arbitrator Renahan on August 19, 2004.

Amongst other terms to which the parties had agreed, the order provided that:

"1. The insurer shall pay ongoing income replacement benefits at a rate of $400.00 weekly from July 16, 2004."

On October 15, 2004, Security National ceased paying income replacement benefits to Mr. Hutchinson on the basis of new medical reports it obtained. Mr. Hutchinson challenged this decision by the Insurer and, in February 2005, commenced this application for arbitration of the dispute (File Number A05-000327). He also argued, through his counsel, that Security National had no right to terminate his income replacement benefits unless and until the order of August 19, 2004 was varied or revoked. Security National finally conceded this point and, on April 28, 2005, it paid the income replacement benefits that it had withheld for the period October 15, 2004 through April 29, 2005 (plus interest). On or about June 30, 2005, Security National paid the benefits that were owing for the period from April 30, 2005 through July 15, 2005 (plus interest). Thereafter, Security National has paid weekly income replacement benefits to Mr. Hutchinson of $400.00. Security National was not, at that point in time, conceding that Mr. Hutchinson was entitled to income replacement benefits due to his medical condition; rather, the Insurer reinstated payment of these benefits because it conceded that it was compelled by the terms of the order of August 19, 2004 to continue making such payments until such time as that order was varied or revoked by a subsequent order of the Commission.

On July 25, 2005, Security National filed an application in File Number A03-001712 to vary the Order of Arbitrator Renahan dated August 19, 2004 on the basis that the test for entitlement to Income Replacement Benefits changed at the 104-week post-accident anniversary (August 23, 2004) and that, based upon new medical information concerning his condition, Mr. Hutchinson no longer met the test for entitlement to such benefits. This, argued the Insurer, constituted a material change in the circumstances of the insured that, pursuant to section 284 of the Insurance Act and Rule 61.1 of the Commission's Rules of Procedure² justified a variation of the Order dated August 19, 2004. Pursuant to subsection 284(2) of the Insurance Act and Rule 63 of the Code, the Director of Arbitrations delegated the hearing of that application for variation/revocation to me, to be heard concurrently with this application (File Number A05-000327).

Issues:

The issues in this hearing are:

1. Is Mr. Hutchinson entitled to receive a weekly income replacement benefit pursuant to section 4 of the Schedule in the amount of $400.00 per week from October 16, 2004 to date and ongoing?

2. Is Security National liable to pay a Special Award pursuant to section 282(10) of the Insurance Act because it unreasonably withheld or delayed payments to Mr. Hutchinson?

3. Is Mr. Huthcinson entitled to his expenses of this arbitration under section 282(11) of the Insurance Act?

4. Is Security National enitled to its expenses of this arbitration under section 282(11) of the Insurance Act?

Prior to the hearing, the parties agreed to add the following issue to this arbitration:

5. "Whether any portion of the income replacement benefits payable to the Insured between March 19, 2003 and August 31, 2004 subject to being repaid to the Insurer, the Insured having received long term disability benefits covering the said period in the amount of $20,000.00 on or about the 2nd day of November, 2005."

On February 26, 2007, the Insurer requested that it be permitted to withdraw this issue on a "without prejudice" basis. The Applicant consented to this request, on the condition that, when making submissions on the issue of expenses of these proceedings, Mr. Wilson is permitted to also seek any costs thrown away in relation to the issue that has now been withdrawn by the Insurer. On this condition, I permitted the withdrawal of this issue.

Result:

1. Given my decision in File Number A03-001712 (also issued today) denying the Insurer's request that the order dated August 19, 2004 be varied, the Insurer's obligation to pay income replacement benefits under the order of August 19, 2004 continues and there is no need for a further determination of this issue.

2. Security National shall pay to Mr. Hutchinson a special award in the amount of $6,000.00.

3. The decision on expenses is deferred at the request of the parties.

THE PROCEEDINGS:

The hearing of this application was held concurrently with the hearing of the Insurer's application to vary the order of August 19, 2004 (File No. A03-001712) on June 19, 20 and 21, 2006 and on February 26, 2007. I received into evidence numerous documents tendered by the parties. On June 20, 2006, I heard testimony from Ruth Billet (a vocational expert) and Dr. Stephen Halman (orthopaedic surgeon). On June 21, 2006, I heard testimony from Dr. Richard Lee-Sing (family physician) and dealt with a number of evidentiary and procedural matters.

On February 26, 2007, counsel for the Insurer advised me that Security National was conceding that Mr. Hutchinson qualifies for income replacement benefits under the "post 104-week" test.³ The Insurer is, therefore, not relying on any of the medical evidence it has adduced at this hearing. Nevertheless, I was advised by Mr. Harvey on February 26, 2007 that Security National was taking the position that the change in the test for entitlement to income replacement benefits as of August 23, 2004 constituted a material change in circumstances and it requested that the order dated August 19, 2004 be varied so that the Insurer's obligation under that order to pay income replacement benefits ends on August 23, 2004.

Mr. Hutchinson brought this application for, amongst other relief, a determination that he qualifies for income replacement benefits, even under the "post 104-week" test. On February 26, 2007, counsel for the Insurer advised me that Security National was conceding that Mr. Hutchinson qualifies for income replacement benefits under the "post 104-week" test. Nevertheless, the Insurer objects to any order being issued by the Commission to this effect.

EVIDENCE AND ANALYSIS:

1. Income Replacement Benefits

The parties agreed that if I denied the Insurer's application to vary the consent order dated August 19, 2004 in File No. A03-001712, then the issue raised in this application concerning Mr. Hutchinson's entitlement to income replacement benefits would be moot. Together with this decision, I am issuing a decision in File No. A03-001712, dismissing the Insurer's application to have that order varied (because the Insurer has failed to prove, on a balance of probabilities, that there has been a material change in the circumstances of Mr. Hutchinson). Consequently, that order remains unchanged and there is no need for me to make any further determination concerning Mr. Hutchinson's entitlement to income replacement benefits.

2. Special Award

(a) Introduction

With respect to the Applicant's claim for a special award, the parties have requested that I decide whether the Insurer ought to pay a special award in this case and the appropriate amount of any such award.

Pursuant to s. 282(10) of the Insurance Act, an arbitrator shall award a lump sum of up to 50 per cent of the amount to which the person is entitled (together with interest) if the arbitrator finds that the insurer has "unreasonably withheld or delayed payments". The Applicant has requested a special award in this case. A special award is not granted merely because the insurer incorrectly interpreted or failed to comply with a provision of the Schedule or the Insurance Act; if that were the case, a special award would be granted to every successful applicant. An insurer can come to the wrong conclusion without having acted unreasonably. A special award is payable under the Insurance Act only if an arbitrator finds than an insurer has acted unreasonably in withholding or delaying the payment of an accident benefit.

(b) Facts

The relevant facts are not in dispute.⁴

On July 19, 2004, the parties reached a settlement in File No. A03-001712 whereby the parties jointly requested that the Commission issue an order in accordance with the signed Consent of the parties, filed with the Commission. That consent order was issued by Arbitrator Renahan on August 19, 2004. Amongst other terms to which the parties had agreed, the order provided that:

"1. The insurer shall pay ongoing income replacement benefits at a rate of $400.00 weekly from July 16, 2004."

By letter dated September 29, 2004, Security National advised Mr. Hutchinson that, effective October 15, 2004, Security National would be terminating his income replacement benefits on the basis of new medical information it had obtained. On October 5, 2004, Mr. Wilson responded on behalf of Mr. Hutchinson, challenging this decision by the Insurer. Mr. Wilson wrote as follows:

"You are purporting to terminate the payment of income replacement benefits to the insured. In doing so, you have overlooked the fact that an Order was made on August 19, 2004 requiring the insurer to pay ongoing income replacement benefits at the rate of $400.00 from July 16, 2004. Consequently, the insurer is bound by the provisions of Section 287 of the Insurance Act. In accordance with that Section, the insurer is required to commence a variation proceeding if it so wishes. I presume that you will act in accordance with the provisions of the said Act."

When Security National continued to refuse to pay any income replacement benefits to Mr. Hutchinson despite the repeated urging of Mr. Wilson that it reconsider its position, on April 1, 2005 Mr. Wilson wrote to counsel for the Insurer, advising that he would be taking steps to issue a Writ of Seizure and Sale against the Insurer in order to enforce the terms of the consent order. Only then did the Insurer agree to reinstate benefits, subject to its right to claim repayment of those benefits. On April 28, 2005, Security National paid the income replacement benefits that it had withheld for the period October 15, 2004 through April 29, 2005 (plus interest). On or about June 30, 2005, Security National paid the benefits that were owing for the period from April 30, 2005 through July 15, 2005 (plus interest). Thereafter, Security National has paid weekly income replacement benefits to Mr. Hutchinson of $400.00. Security National was not, at that point in time, conceding that Mr. Hutchinson was entitled to income replacement benefits due to his medical condition; rather, the Insurer reinstated payment of these benefits because it conceded that it was compelled by the terms of the order of August 19, 2004 to continue making such payments until such time as that order was varied or revoked by a subsequent order of the Commission. Nevertheless, Security National did not actually file an application to vary or revoke the consent order until July 25, 2005.

(c) Entitlement

(i) Submissions of the Applicant

It is the Applicant's position that the withholding of income replacement benefits by Security National in this case was unreasonable because such action flew in the face of an order of the Commission to which it had consented and was contrary to section 287 of the Insurance Act, which reads as follows:

Protection of Benefits

287. An insurer shall not, after an order of the Director or of an arbitrator appointed by the Director, reduce benefits to an insured person on the basis of an alleged change of circumstances, alleged new evidence or an alleged error, unless the insured person agrees or unless the Director or an arbitrator so orders in a variation or appeal proceeding under section 283 or 284.

Normally, where a dispute arises concerning payment of accident benefits, the insured person must initiate proceedings to challenge the decision of the insurer. Once an insured person obtains an order from the Commission (whether on consent or as a result of a contested hearing), however, unless the order itself contains some limit on the insurer’s obligations arising from the order, the insurer must continue paying the benefits ordered until such time as a new order is issued as a result of an appeal or a variation/revocation application.⁵ Where there exists an order requiring ongoing payment of benefits, it is the insurer that must take the initiative to commence proceedings if it wishes to challenge that order in some way. If the insurer seeks to have the order varied or revoked, it must prove that there has been a material change in the circumstances of the insured or that evidence that was not available at the time of the arbitration or appeal has become available or that there is an error in the order.⁶ Pending the outcome of that variation/revocation application, the insurer may not reduce the benefits to the insured person unless the insured person agrees or unless the Director or an arbitrator so orders.⁷

Mr. Wilson submits that there is nothing illogical, in the realm of consumer protection, in requiring an insurer to continue making payments that have been ordered by the Commission until such time as the insurer can demonstrate to the Commission that the order requiring such payments ought to be varied or revoked. If the insurer is successful on its application, it can, of course, seek repayment of any benefits it has paid to the insured person during the intervening period.⁸ If an insurer consents to an order for the payment of benefits without any qualifications or time limits, it should be aware that the natural consequence will be that the insurer cannot merely terminate benefits whenever it feels that there is a good reason to do so (for instance, on the basis of new medical information) as that will be a contravention of the order to which it consented. Such an insurer will have to commence a variation/revocation application and continue making payments to the insured person until the Commission, through a subsequent order, permits the insurer to terminate the benefit(s) in question. That is the procedure, submits Mr. Wilson, that ought to have been followed by Security National and, according to Mr. Wilson, Security National had no reasonable, lawful justification for withholding Mr. Hutchinson’s income replacement benefits in this case.

(ii) Submissions of the Insurer

The Insurer’s position is that the consent order only applied to Mr. Hutchinson’s entitlement to income replacement benefits under the pre-104-week test and, therefore, the order ceased to be operative after August 23, 2004 (the date upon which the test changed). If this is the case, then section 287 of the Insurance Act does not apply and the Insurer was entitled to terminate payment to Mr. Hutchinson of income replacement benefits once there was medical evidence that he no longer qualified for such benefits under the post-104-week test. In the alternative, if the Insurer's belief that the order ceased to have any effect after August 23, 2004 was incorrect, it is submitted that such belief was not unreasonable in all of the circumstances and, therefore, no special award ought to be ordered against Security National.

(iii) Analysis

I find that the withholding of income replacement benefits in this case was unreasonable. Both the terms of the order to which Security National had consented and the provisions of section 287 of the Insurance Act are clear and unambiguous. By the deal it struck with Mr. Hutchinson in July 2004, Security National obliged itself to continue paying income replacement benefits at the rate of $400.00 per week until, through a variation/revocation proceeding, it obtained an order that permitted it to do otherwise. In the absence of any testimony from the persons who made the decision to withhold these benefits, it is impossible to know what they actually believed. If, however, the Insurer believed that the order to which it consented automatically ceased to have any effect a few days after it was signed, such belief would not only have been misinformed, it would also have been unreasonable.

Counsel for the Insurer argued before me that Mr. Wilson (and, therefore, his client) ought to have know that a change in the test for entitlement can be a material change in the circumstances of an insured person because of the decision in Ramalingam and State Farm Mutual Automobile Insurance Company.⁹ I have dealt with that argument in my order in File No. A03-001712. But by that same June 2004 Ramalingam decision, however, the Insurer ought to have known that in the face of an order of the Commission that contains neither qualifying language nor a date upon which the obligation to pay benefits terminates, an insurer is obliged to continue paying the benefits ordered until such time as it obtains (through a variation/revocation proceeding) an order to the contrary.

In the Ramalingam case, the claim for a special award related to the insurer’s breach of the interim order was ultimately denied¹⁰ because it was determined by Arbitrator Rogers that both parties were aware that the interim order of Arbitrator Alves was intended to be limited to Mr. Ramalingam's entitlement to pre-104 week benefits.¹¹

In the present case, I have found that there was no agreement to so limit the terms of the consent order. Therefore, it was unreasonable for Security National, in October 2004, to ignore the terms of the order to which it had consented only a couple of months earlier and to proceed to terminate payment to Mr. Hutchinson of income replacement benefits.

(d) Amount of the Special Award

The parties have agreed that the maximum amount that can be granted as a special award in this case is $8,500.00.

The case law on this issue requires that the amount awarded be proportionate to: (i) the blameworthiness of the insurers conduct; (ii) the vulnerability of the insured person; (iii) the harm or potential harm directed at the insured person; (iv) the need for deterrence; (v) the advantage wrongfully gained by the insurer from the misconduct; and (vi) other penalties or sanctions that have been or are likely to be imposed on the insurer.¹² Factors that have been considered by the Commission include: the amount of benefits unreasonably withheld or delayed, the time the benefit was withheld, failing to respect important obligations under the Schedule, aggravating factors and mitigating factors.¹³

Special awards at or near the higher end of the permissible range are generally reserved for cases where the insurer's conduct has been egregious and where there are no mitigating factors.¹⁴

Finally, the amount ordered against an insurance company under this heading must be large enough to further the goals of punishment and deterrence.¹⁵ The purpose is to punish insurers that unreasonably fail to pay accident benefits promptly and to deter that company and others from acting similarly in the future.¹⁶ However, where the maximum permissible special award will, in absolute terms, be a relatively small sum, it may be appropriate to assess the special award closer to the maximum than otherwise might be appropriate (i.e. even where there is no evidence of egregious or flagrant misconduct or bad faith on the part of the insurer) in order to avoid granting a remedy that cannot have any deterrent effect and is, for all intents and purposes, meaningless.¹⁷

Mr. Wilson submits that there can be no worse conduct on the part of an Insurer than deliberately disregarding an order of the Commission and that only a special award that is at or near the maximum is likely to have any deterrent effect in this case (i.e. in the range of approximately $6,000.00 to $8,500.00). Mr. Wilson further points out that even when he reminded the Insurer about the relevant provisions of the Order and the Insurance Act, the Insurer continued to maintain its stubborn, inflexible approach and it only reinstated the benefits when it realized that Mr. Wilson was about to have the sheriff seize the money that was owing. Since there was no real "change of heart" on the part of the Insurer, argues Mr. Wilson, its reinstatement of the benefits ought not to be considered a mitigating factor in this case.

Mr. Harvey argues that, although the Insurer’s interpretation of the law may have been incorrect, there was some law to support the Insurer’s position and there is no evidence that it was acting out of malice or in bad faith. Furthermore, he points out that the amounts involved are relatively small, that the benefits were only withheld for a few months and that interest was paid to Mr. Hutchinson for the amounts that had been withheld. Mr. Harvey suggests that where there are a number of mitigating factors and no aggravating factors, a nominal award (of no more than $850) would be more appropriate.

I agree with Mr. Harvey that there is no actual evidence of malice or bad faith in this case. I also agree that the situation was mitigated to some extent by the fact that the amounts withheld were relatively small and the delay was relatively short. On the other hand, I do not give Security National nearly as much credit for this as I might have done had it decided to reinstate the benefits prior to Mr. Wilson threatening to have the arrears seized by the sheriff.

The need for deterrence is an important consideration in this case. Where a special award is warranted, it must be large enough to deter the respondent and other insurance companies who become aware of the decision from engaging in similar conduct in the future.

The amount suggested by Security National in this case would likely have no deterrent effect whatsoever. Too small an award will amount to little more than a "slap on the wrist" or, even worse, a licence to engage in similar conduct in the future.

Bearing in mind the "proportionality" approach and the facts set out above, in all of the circumstances of this case, I find the appropriate lump sum amount of the special award that Security National ought to pay to the Applicant is $6,000.00.

EXPENSES:

At the conclusion of the hearing on February 26, 2007, the parties asked that I defer the issue of entitlement to expenses of this application. If the parties cannot agree on the issue of entitlement or amount, they may now make submissions on both issues in accordance with Rule 79 of the Dispute Resolution Practice Code.

May 25, 2007

Richard Feldman
Arbitrator

Date

Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2007 ONFSCDRS 106
FSCO A05-000327

BETWEEN:

LINTON HUTCHINSON
Applicant

and

SECURITY NATIONAL INSURANCE CO./ MONNEX INSURANCE MGMT. 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. Pursuant to subsection 282(10) of the Insurance Act, Security National shall pay to the Applicant a special award in the amount of $6,000.00.

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

May 25, 2007

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. 2as set out in the Dispute Resolution Practice Code (Fourth Edition, Updated — October 2003) (the "Code").
3. 3After 104 weeks of disability, the test changes from "a substantial inability to perform the essential tasks of the employment" to "a complete inability to engage in any employment for which [the insured person] is reasonably suited by education, training or experience".
4. 4most of the relevant documentation is contained in Exhibit 16.
5. 5Nelson and Liberty Mutual Insurance Company (FSCO A00-000253, November 8, 2001) at pp. 5 - 7, cited with approval in Allstate Insurance Company of Canada and Simpson (FSCO P01-00057, June 6, 2003) Appeal at pp. 5 - 7.
6. 6Subsection 284(3) of the Insurance Act.
7. 7Section 287 of the Insurance Act.
8. 8since, pursuant to subsection 284(4) of the Insurance Act, the variation or revocation can be made retroactive.
9. 9(FSCO A02-001646, June 8, 2004).
10. 10except with respect to interest that was unreasonably withheld: Ramalingam and State Farm Mutual Automobile Insurance Company (FSCO A02-001646, August 29, 2005) at 18.
11. 11Ramalingam and State Farm Mutual Automobile Insurance Company (FSCO A02-001646, August 29, 2005) at 17-18.
12. 12Liberty Mutual Insurance Company and Persofsky (FSCO P00-00041, January 31, 2003) Appeal at 31 and 32
13. 13'Liberty Mutual Insurance Company and Persofsky (FSCO P00-00041, January 31, 2003) Appeal at 32 and 33
14. 14Bibby and Pilot Insurance Company (OIC A-009742, December 22, 1995) at p. 31; Brait and Allstate Insurance Company of Canada (OIC A96-000786, July 23, 1997) at 12; and Rudar v. Lombard General Insurance Co. of Canada (FSCO A97-000629, June 12, 1998); Prudential of America General Insurance Company (Canada) and Chafe-Moote (FSCO P99-00044, September 8, 2000) Appeal at 22; Graper and Liberty Mutual Fire Insurance Company (FSCO A00-000133, July 20, 2001) at 46.
15. 15but no larger than is needed to serve that purpose: Liberty Mutual Insurance Company and Persofsky (FSCO P00-00041, January 31, 2003) Appeal at 31, adopting the approach from Whiten v. Pilot Insurance Company, 2002 SCC 18, [2002] S.C.J. No. 19.
16. 16Liberty Mutual Insurance Company and Persofsky (FSCO P00-00041, January 31, 2003) Appeal at 31.
17. 17Pafco Insurance Company Limited and Langdon (FSCO P02-00017, July 17, 2003) Appeal at p. 17.