Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2007 ONFSCDRS 188

Appeal P06-00041

Appellant

and

Respondent

BEFORE:

Nancy Makepeace

Gary McLellan, representing himself

James M. Brown for Aviva

HEARING DATE:

September 7, 2007, in Kingston, Ontario

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

The appeal is dismissed and the arbitrator’s order dated October 31, 2006 is confirmed.
If the parties are unable to agree about expenses of this appeal, a hearing may be arranged in accordance with Rule 79 of the Dispute Resolution Practice Code.

October 4, 2007

Nancy Makepeace Director’s Delegate

Date

Mr. McLellan appeals from the arbitrator’s ruling about the amount of his income replacement benefit. He claims the arbitrator erred in determining his income from self-employment and his accident-related business losses.

I am not persuaded the arbitrator erred.

The arbitrator described the background to the dispute at the outset of his decision.

There was no dispute that Mr. McLellan is entitled to ongoing income replacement benefits (“IRBs”) under section 5 of the SABS–1996¹ because of injuries he sustained in the December 9, 2000 accident, including entitlement beyond 104 weeks of disability in accordance with clause 5(2)(b). The disagreement was about the amount of benefits owed.

Mr. McLellan was self-employed carrying on two businesses before the accident – Wave Management Systems (“WMS”), which designed computer hardware and software systems and provided training and service for its clients, and Wave Computer Design (“WCD”), which was engaged in computer sales, delivery and set-up. Mr. McLellan testified that WCD was created to service the clients of WMS, but would not be profitable on its own. There was no dispute that WMS ceased operations immediately after the accident, and that Mr. McLellan kept WCD going at a loss for some time after the accident.

The insurer paid Mr. McLellan a base IRB of $91.09 per week for the 103 weeks following the initial one-week waiting period mandated by clause 5(2)(a) of the SABS-1996, and “over $15,000 in additional IRBs for accident-related losses from self-employment for the period December 16, 2000 to December 31, 2001.”² The rules for determining the “base” IRB are set out in subsections 6(1)-(4) of the SABS-1996, and the rules for determining the additional amount that is payable for accident-related businesses losses are set out in subsections 6(5)-(5). Since the second anniversary of the accident (December 9, 2002), the insurer has paid, and continues to pay a weekly IRB of $185, the minimum mandated by clause 6(1)(b) of the SABS-1996.

Mr. McLellan claimed he was entitled to a higher IRB. The arbitrator heard three days of evidence in October 2006 and released his decision promptly on October 31, 2006. He rejected Mr. McLellan’s submission that he was entitled to a higher base rate for the first two years after the accident, ruling that $91.09 per week was the correct rate. He also rejected Mr. McLellan’s submission that he was entitled to more than the $185 minimum weekly benefit ongoing after the two-year mark. However, the arbitrator rejected the insurer’s submission that no business losses were incurred in 2002, finding that Mr. McLellan kept WCD operating until June 30, 2002. He found that Mr. McLellan had sustained accident-related losses from self-employment of $599.78 for the period December 9-31, 2000 (roughly the three weeks after the accident), $14,979.14 for 2001, and $7,489.56 for the first six months of 2002. He also ordered interest to be paid on overdue benefits under section 46 of the SABS-1996.

Mr. McLellan appeals. He claims the arbitrator erred by accepting inaccurate and misleading accounting information provided by the insurer. In response, the insurer claims the appeal does not raise a question of law and that the arbitrator’s decision was supported by the evidence. The insurer claims its appeal expenses.

For the most part, Mr. McLellan’s appeal is a restatement of his position at the arbitration hearing. The main issue in the appeal is whether the arbitrator erred in treating WMS and WCD as one business rather than two for income calculation purposes. In general, Mr. McLellan asks me to reject the accounting evidence on which the arbitrator relied and substitute my own findings based on the accounting evidence on which Mr. McLellan relied. This goes beyond my role on appeal, and in any event, I am not satisfied the arbitrator erred.

A. WMS and WCD: One Business or Two?

In the course of adjusting Mr. McLellan’s claim, the insurer retained Wilkinson & Company, chartered accountants (“Wilkinson”) to determine the amount of benefits payable. Mr. G.W. Silverthorn, a chartered accountant with Wilkinson, prepared a number of reports between April 2001 and January 2004, and another Wilkinson chartered accountant, Mr. Robert G. Deacon, prepared further reports and testified at the arbitration hearing. The insurer, relying on the Wilkinson reports, treated the two businesses as generating one income stream. Mr. McLellan relied on the February 21, 2005 report of Mr. Bruce G. Brooks, a chartered accountant with Collins Barrow, chartered accountants (“Collins Barrow”), who treated WMS and WCD as separate businesses. This would result in a higher IRB because it would allow WCD to carry Mr. McLellan’s business losses before and after the accident.³

The arbitrator rejected Mr. Brooks’ approach, stating his reasons at pp. 6-7 of the decision:

First, there are significant questions whether these companies are indeed distinct. Mr. Brooks, himself, noted the close relationship of the two companies, stating that “the closure of WCD was the reduction of an ongoing business loss which could no longer be subsidized due to the loss of his first source of income.”

Further, Mr. McLellan confirmed on cross-examination that both companies had always operated from the same office, even when the office moved. Both companies had the same telephone number. Both companies had the same GST registration number. Both companies operated through Mr. McLellan’s personal bank account. 90 per cent of customers paid their bills by cheque made out personally to Mr. McLellan. Only in 2000, the year of the accident, did Mr. McLellan differentiate between the financial affairs of the two companies, a change which he never adequately explained other than to say it was a more accurate reflection of his income.

Secondly, even if one accepts that these are two distinct companies, as supported by their

separate registrations in January and October 1996 and that WCD continued in operation after WMS, there is a question regarding the allocation of expenses.

Mr. McLellan testified that the hourly rate charged for the services of WMS included a

consideration of travel expenses, specifically gas. Nonetheless, the year of the accident, for the first time, all auto and gas, van lease and auto insurance expenses are attributed solely to WCD. In addition, both companies shared the same telephone, yet all telephone expenses are allotted solely to WCD. Both companies shared the same office, yet all rent expenses are allotted to WCD.⁴

The arbitrator’s third reason for treating the businesses as one was that Mr. Brooks’ approach did not reflect the reality of WCD’s businesses losses after the accident, losses for which the insurer had compensated Mr. McLellan by paying over $15,000 pursuant to subsection 6(5) of the SABS-1996:

These losses were solely those of WCD. The Applicant does not submit that this was an error, or that these monies should be repaid. I find that it is inconsistent and that an unfair result would follow if WCD were ignored in setting a base IRB of $312.74, while at the same time, benefits paid pursuant to subsection 6(5) of the Schedule solely with respect to the same WCD are retained.

In any event, I find that Mr. McLellan did sustain losses from self-employment as a result of this accident, and that he was entitled to the additional subsection 6(5) IRB payments.⁵

The arbitrator also rejected Mr. McLellan’s submission that he should be treated as an employee of WMS, which would again have the effect of disregarding WCD’s losses. He found that Mr. McLellan’s case was different from Piper and Zurich Insurance Company, (FSCO A-002585, December 6, 1993), where an electrician was treated as an employee of his incorporated business for purposes of calculating his income replacement benefit:

. . . Piper involved a corporation, not a sole proprietorship. Piper also involved a long-standing salary arrangement, whereas, in this case, a T4 was issued for the first time the year of the accident.⁶

Piper was an unusual case on its facts. More pertinent to this case is Bonitatibus and Wellington Insurance Company, which was cited by the arbitrator for the following statement:

I accept that the Applicant clearly has the right to structure his financial affairs,

within the law, in whatever manner he chooses. However, I find I cannot accept

inconsistent evidence which restates the Applicant’s income from employment

or self-employment so as to maximize his benefit under the No-Fault Benefits

Schedule.⁷

The arbitrator concluded that Collins Barrow’s accounting approach:

. . . serves to artificially inflate the Applicant’s IRB entitlement by not merely minimizing, but eliminating all expenses which rightly belong to WMS. I find that this approach neither fairly nor realistically reflects Mr. McLellan’s actual income situation and would result in overcompensation.⁸

In summary, the arbitrator treated WCD and WMS as one business because he found that Mr. McLellan had done so and that this provided a fairer and more realistic reflection of Mr. McLellan’s income loss resulting from the accident.

On appeal, Mr. McLellan submits the arbitrator erred in law by disregarding the legal distinctness of the two businesses. I reject this. The arbitrator’s approach is consistent with well-established authorities for the proposition that benefits are to be determined based on the reality of the claimant’s business activities, not the form of the business structure. For example, the insurer relies on Iankilevitch and CGU Insurance Company of Canada, (FSCO P03-00013, August 31, 2004), in which I reaffirmed the Commission’s “functional approach that prefers substance over form,” and relied on the well-established principle that the objective is “to ensure that the insured person receives an income replacement benefit that fairly and realistically reflects her actual income situation, avoiding both over- and under-compensation.⁹”

Mr. McLellan’s businesses were not incorporated and the overwhelming evidence before the arbitrator was that he operated as a sole proprietor carrying on what was in reality a single business enterprise. Treating Mr. McLellan as an employee of WMS or attributing all his business losses to WCS would result in an unrealistically high IRB based on revenue without consideration of losses. That is not what the SABS provides.

The arbitrator also rejected Mr. McLellan’s submission that he should be compensated for his lost revenue after the accident, as well as his business losses, especially considering his was a fledgling business and just beginning to do well. As suggested by the arbitrator, there is no authority for compensating future economic loss under the SABS-1996.¹⁰ Finally, the arbitrator did not err in rejecting Mr. McLellan’s submission that compensation of business losses under subsection 6(5) of the SABS-1996 continues indefinitely, regardless of whether the losses or the business continues.

I am not persuaded the arbitrator erred.

B. Benefits Post-104 Weeks

According to the arbitrator, the insurer has paid and continues to pay the minimum IRB of $185 per week prescribed under clause 6(1)(b) for benefits after 104 weeks of disability. Though this was not an issue at the arbitration, Mr. McLellan submits on appeal that he is entitled to $185 per week in addition to the $91.09 calculated under clause 6(1)(a). He bases this argument on the legislature’s use of the word “and” rather than “or” in clause (b). I reject this.

Subsection 6(1) is as follows:

6(1) The amount of the income replacement benefit shall be,

(a) for each of the first 104 weeks of disability, 80 per cent of the insured person’s net weekly income from employment determined in accordance with section 61; and

(b) for each week after the first 104 weeks of disability, the greater of the amount specified in clause (a) and $185.

Mr. McLellan’s interpretation disregards the phrase “the greater of” in clause (b), which offends the interpretive principle that all the words of a statute or regulation must be given meaning. In any event, the clear purpose of clause 6(1)(b) is to provide a minimum weekly benefit for the more seriously injured claimants – those who continue to qualify for income replacement benefits after 104 weeks.

C. Procedural Issues

Mr. McLellan challenges Mr. Deacon’s expert qualifications, but they were agreed at the arbitration hearing, and I have no reason to second-guess the arbitrator’s recognition of Mr. Deacon as an accounting expert in the calculation of accident benefits for self-employed claimants.¹¹ Mr. McLellan claims he should have been allowed to cross-examine Mr. Deacon because he has the accounting qualifications for doing so and his counsel did not. Unfortunately, this misunderstands the hearing process. Mr. McLellan retained a lawyer to represent him at the hearing, and my review of the transcript gives me no reason for concern about the quality of representation he received, either by way of presentation of the evidence, including the cross-examination of Mr. Deacon, or by way of closing argument. Finally, while Mr. McLellan feels that his inability to pay for Mr. Brooks’ attendance at the hearing undermined his claim, I find that the arbitrator took care to ensure that the Collins Barrow report was examined at the hearing, and his reasons for rejecting the report were anticipated by his questions to counsel. In summary, the arbitrator was presented with two expert reports, which he considered carefully. He preferred the Wilkinson approach because he found it provides a fairer and more realistic picture of Mr. McLellan’s accident-related income loss. I find no error.

Nor can I find any support on the record for Mr. McLellan’s claim that the insurer has attempted to destroy his business and his personal life. The insurer concedes his ongoing entitlement to income replacement benefits, and my review of the record suggests the parties had a legitimate disagreement about how to calculate IRBs for a self-employed claimant.

D. Conclusion

Having reviewed the arbitration record as a whole, including the exhibits and the transcript, I have no reason to doubt the correctness of the arbitrator’s findings of fact. The arbitrator conducted a fair hearing, considered the evidence before him, and made a well-reasoned decision that was amply supported by the evidence. He engaged in a detailed review of the various accounting issues and I have no basis for second-guessing his analysis or his findings. Nor is it my role to do so, since subsection 283(1) of the Insurance Act limits appeals to questions of law.

I have no doubt the accident has had unfortunate consequences for Mr. McLellan, and that he is unhappy with the arbitrator’s disposition of his case, but this appeal had little merit.

IV. EXPENSES

If the parties are unable to agree about expenses of this appeal, a hearing may be arranged in accordance with Rule 79 of the Dispute Resolution Practice Code.