Security National Insurance Co./Monnex Insurance Mgmt. Inc. v. Noel Morgan, 2007 ONFSCDRS 207

Financial Services Commission of Ontario

Neutral Citation: 2007 ONFSCDRS 207 Appeal P07-00002 OFFICE OF THE DIRECTOR OF ARBITRATIONS

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

and

NOEL MORGAN Respondent

BEFORE: David Evans

REPRESENTATIVES: David Silverstone for Security National Barry Munroe for Mr. Morgan

HEARING DATE: June 13, 2007

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 allowed. Paragraph 2 of the arbitrator’s order dated December 22, 2006 is revoked and replaced by the following:

   2. Security National is not required to produce any of its surveillance or supporting documentation at this time, but it must indicate within 60 days of the hearing whether or not it will be relying on its surveillance, and, if so, it must produce all the information and documentation required by Rule 40.1 of the Dispute Resolution Practice Code at that time.

2. 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 29, 2007

David Evans Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

Security National appeals the arbitrator’s order that it produce all its current and any future surveillance information, supporting correspondence and reports regarding any surveillance of Mr. Morgan.

II. BACKGROUND

Mr. Morgan claims statutory accident benefits pursuant to the SABS–1996¹ for injuries arising out of an April 25, 2002 motor vehicle accident. At the pre-hearing on May 30, 2006, production issues included whether Security National should be required to inform Mr. Morgan if surveillance materials existed and, if so, to produce them.

Security National acknowledged that surveillance had taken place, that it continued, and that any reliance on it would be determined within 60 days of the hearing. It relied on Rule 40.1 of the Dispute Resolution Practice Code (DRPC) Fourth Edition – Updated October 2003, to otherwise keep its surveillance secret, such as when surveillance had taken place. Rule 40.1 [4th], set out further below, provides that if a party “intends to rely on any portion of surveillance or investigative evidence,” it must provide all the surveillance materials.

The arbitrator reviewed Rule 40 [4th], as well as the appeal decision in Puljic and Zurich Insurance Company, (FSCO P00–00022, June 1, 2000), which considered the equivalent Rule 37.1 of the third edition of the DRPC.² The Director’s Delegate (as he then was) held that “the clear implication of Rule 37.1 [3rd] is that the insurer’s production obligation only arises when it decides ‘to rely on any portion of surveillance or investigative evidence.’”

However, the arbitrator held: “I respectfully disagree with that conclusion in the context of the 4th edition of the DRPC.” She considered that, in light of other rules, her discretion was “unfettered in respect of Rule 40”:

I agree with Mr. Morgan that the DRPC sets out the minimum standards for production and admissibility which, pursuant to Rule 1.1, are to be interpreted “broadly, to produce the most just, quickest and least expensive resolution of the dispute.” As well, Rule 81 gives arbitrators broad powers to make such orders as he or she considers just subject to the provisions of either the Insurance Act or the Statutory Powers Procedure Act. Therefore, I find that I have the authority to order the early and continuing production of surveillance information produced by Security or its agents. Further, I find that Rule 40 is not determinative of when the insurer’s obligation to disclose arises. The obligation arises, in the absence of agreement between the parties, when an arbitrator determines it to have arisen.

The arbitrator over the space of a couple of pages then considered General Accident Assurance Company et al. v. Chrusz et al. (1999), 1999 CanLII 7320 (ON CA), 45 O.R. (3rd) 321 (C.A.), a case discussing solicitor-client and litigation privilege. The minority opinion by Doherty J expressed the view that even if evidence meets the dominant purpose test for litigation privilege, the court may apply a “balancing approach” such that the party seeking disclosure may show that the privilege was trumped by societal interest. The arbitrator applied this theory to find Security National had a duty to disclose the product of its surveillance. Since, in reliance on Rule 40.1, it had not disclosed when its surveillance was conducted, the arbitrator essentially ordered it all produced: that surveillance conducted before mediation, if any, was not protected by litigation privilege,³ and for that created afterwards, “Security’s litigation privacy zone is clearly trumped by Mr. Morgan’s interest in knowing the nature of the surveillance.”

III. ANALYSIS

I fail to see how the minority opinion in Chrusz governs the dispute resolution process at FSCO. Indeed, as the arbitrator noted, the majority in Chrusz agreed that “the balancing approach preferred by Justice Doherty would open the flood gates of pre-trial discovery motions seeking the court’s determination of where the societal interests lay.” There is no reason to import such complications into our system, and I find that the whole point of Rule 40.1 is to avoid the difficulties that occur in the court system by setting out a simple rule regarding surveillance. However, I will not discuss the “balancing approach” further, since I find that Rule 40.1 governs, that it is determinative of when the insurer’s obligation to disclose arises, and that the context in the DRPC 4th is identical to that in the DRPC 3rd. Accordingly, the arbitrator was bound by Puljic. Finally, Rule 81 does not give an arbitrator carte blanche to simply ignore the rules.

As I recently reiterated in Gurney and Allstate Insurance Company of Canada, (FSCO P05-00005, January 27, 2006),⁴ appeal decisions are binding on arbitrators. That is, as the former Director of Arbitrations stated in Vo and Maplex General Insurance Company and Insurance Bureau of Canada, (OIC P–002777, December 12, 1997), “decisions of the Director [or Delegate], to the extent they cannot be distinguished,⁵ are binding on the arbitrators.”⁶ In Vo, the section under consideration had been the subject of three different interpretations, and the Director herself found the section had no clear and obvious meaning on its face.⁷ However, in this case, the rule is straightforward, and since the arbitrator issued her decision, arbitrators in two other cases not only found they were bound by Puljic, but agreed with it: Graham and ING Insurance Company of Canada, (FSCO A06–001695, February 12, 2007), and MacKenzie and Royal & SunAlliance Insurance Company of Canada, (FSCO A07–000553, September 20, 2007).

Turning to the rules under consideration in Puljic, the rule regarding surveillance, R. 37.1 [3rd], is essentially identical to R. 40.1 [4th], as set out below. The rules are placed in chronological order, and the differences between them are in italics:

37. SURVEILLANCE EVIDENCE

37.1 If a party intends to rely on any portion of surveillance or investigative evidence, including videotapes, photographs, reports, notes and summaries of surveillance observations or investigations, the party shall provide:

1. the names and qualifications of the persons who secured the investigative or surveillance evidence, the dates, times and places where any surveillance or investigation was undertaken; and

2. copies of all videotapes, photographs, reports, notes and summaries taken or prepared by anyone upon whose evidence the party intends to rely at the hearing.

40. SURVEILLANCE EVIDENCE

40.1 If a party intends to rely on any portion of surveillance or investigative evidence, including videotapes, photographs, reports, notes and summaries of surveillance observations or investigations, at least 30 days before the hearing, the party shall provide:

(a) the names and qualifications of the persons who secured the investigative or surveillance evidence, the dates, times and places where any surveillance or investigation was undertaken; and

(b) copies of all videotapes, photographs, investigative reports, notes and summaries taken or prepared in connection with the issues in dispute.

With respect to the issue here, there is no functional difference between the two rules. The arbitrator described Rule 40 [4th] as follows:

In my opinion, Rule 40 constitutes an all or nothing rule. It requires the party seeking to rely on surveillance evidence to produce all of the surveillance or none of it. Thus, Rule 40 protects the integrity of the hearing process by denying the party relying on the surveillance the ability to cherry pick those elements of the surveillance information that support its case while burying its totality.

That is what the Director’s Delegate in Puljic said about Rule 37 [3rd]:

While it might be argued that this rule deals only with surveillance on which the insurer intends to rely, remaining silent on the disclosure obligations for other surveillance, I am not convinced that is a fair reading.

However, the Director’s Delegate in Puljic went on to consider the opening of the first paragraph of the rule, which reads: “If a party intends to rely on any portion of surveillance or investigative evidence….” [Emphasis added.] As already noted, he stated: “In my opinion, the clear implication of Rule 37.1 is that the insurer’s production obligation only arises when it decides ‘to rely on any portion of surveillance or investigative evidence.’” I agree with that reading. Furthermore, the opening paragraphs in each rule are identical, other than that the time limit for production is set out in R. 40.1 [4th].

The arbitrator disagreed with Puljic because of the alleged different context between the two DRPCs. However, a close reading of the rules at issue in Puljic and here does not reveal any significant difference. In Puljic, the applicant was seeking just the particulars of any surveillance done up to the time of the hearing, whether or not the insurer intended to rely on it. Mr. Puljic relied on Rule 32.1 [3rd]. Rules 32.1 and 32.3 [3rd] have been combined into Rule 32.2 [4th]:

32.1 Before a pre-hearing discussion, the parties must exchange the documents that are reasonably necessary to determine the issues being arbitrated….

32.3 The parties have an ongoing responsibility to ensure the prompt and complete exchange of documents including updates to the information previously exchanged and any additional documents obtained

32.2 Subject to the time lines under Rule 39, the parties have an ongoing responsibility to ensure the prompt and complete exchange of documents that are reasonably necessary to determine the issues being arbitrated, including updates to the information previously exchanged and any additional documents obtained. [Emphasis added.]

On appeal, Mr. Puljic argued that the arbitrator erred in refusing his request because the information is “reasonably necessary to determine the issues being arbitrated,” within the meaning of Rule 32.1 [3rd]. As can be seen, that same phrase appears in Rule 32.2 [4th], so there is no difference in context on that basis. The only difference in the context is the opening phrase of Rule 32.2 [4th], “Subject to the time lines under Rule 39….” I will return to that point below.

The Director’s Delegate in Puljic felt that the stronger argument for Mr. Puljic was rather contained in Rule 32.4 [3rd], which has its equivalent in Rule 32.3 [4th]:

32.4 An arbitrator may at any time order the production of any document or the giving of information that he or she considers relevant to the determination of the issues in the arbitration, on such terms as he or she considers appropriate.

32.3 Subject to Rule 39, an arbitrator may at any time order the production of documents or the giving of information that he or she considers relevant to the determination of the issues in the arbitration, on such terms as he or she considers appropriate.

Again, other than the reference to Rule 39 [4th], the rules are identical. The arbitrator placed a great deal of weight on Rule 39, but its elements were also present in Rules 36.4 and 36.2 [3rd]:

36. EVIDENCE AND WITNESSES

36.4 If a party intends to introduce documents that have not been filed, the party must file the document and the information required by these Rules and serve a copy on the other parties as soon as possible, but not less than 10 days before the first day of the hearing, or on such terms as the arbitrator considers appropriate.

39. EVIDENCE

39.1 Subject to Rule 39.2, all documents, reports (including experts' reports) and assessments to be introduced at a hearing by either party must be served on the other party at least 30 days before the first day of the hearing.

39.2 In extraordinary circumstances, a party may seek an arbitrator's permission to serve a document, report or assessment on the other party for use at a hearing less than 30 days before the first day of hearing.

36.1 The arbitrator will determine the relevance, materiality, and admissibility of the evidence.

36.2 The arbitrator will not admit evidence at a hearing:

1. that would not be admissible in a court by reason of any privilege under the law of evidence; or

2. that is not admissible under the Insurance Act.⁸

39.3 The hearing arbitrator will determine the relevance, materiality, and admissibility of evidence submitted at the hearing, but will not admit evidence at a hearing that:

(a) would not be admissible in a court by reason of any privilege under the law of evidence; or

(b) is not admissible under the Insurance Act; or

(c) was not served on the opposing party in accordance with Rules 39.1 and 39.2, unless the hearing arbitrator is satisfied that extraordinary circumstances exist to justify an exception.

With respect to the references to Rule 39 [4th] in Rules 32.2 and 32.3, the arbitrator stated: “There is a specific exclusion of Rule 39, but not Rule 40, in Rule 32.3. The result is an arbitrator’s discretion pursuant to Rule 32.2⁹ is unfettered in respect of Rule 40.” However, there is not an exclusion of Rule 39, but rather Rules 32.2 and 32.3 are subject to Rule 39. The parties are enjoined by Rule 32.2 to observe the time lines – production no later than 30 days before the hearing – when making updates. As for arbitrators, not only must they consider the time lines before making any production orders, but their orders are subject to the laws of privilege [Rule 39.3(a)] and any rules regarding admissibility under the Insurance Act [Rule 39.3(b)].

Thus, I agree with the reasoning of the arbitrator in MacKenzie, who stated:

I have considered the reasoning of the arbitrator in Morgan and with respect I do not agree. To my mind, the reference to Rule 39 in Rule 32.3 more likely was intended to operate as a limit on the obligations and opportunities for the parties under Rule 32.3 – that is, there is an ongoing obligation to produce but that everything that is going to be relied upon in the hearing must be produced and served at least 30 days before the hearing. To put it another way, both Rule 32.2 and Rule 32.3 are subject to Rule 39 to reinforce the bottom line requirement that everything that is going to be relied upon be provided to the other side in a verifiable way at the latest 30 days prior to the hearing. To my mind, it does not expand the authority of an arbitrator to order the production of surveillance materials in light of the specific provisions of Rule 40.¹⁰

To which I would add, as already noted, that any production orders made by an arbitrator are subject to the laws of privilege.

I will make a final point regarding Rule 81 [4th] – the waiver of procedural requirements, on which the arbitrator relied. Again, the equivalent rule existed under the DRPC [3rd] as Rule 79. Rules 79.1 [3rd] and 81.1 [4th] provide as follows:

79.1 Subject to the requirements of the Insurance Act and the SPPA, the adjudicator may on such terms as he or she considers appropriate: a. set aside any time limit set out in these Rules for doing any act, serving any notice, filing any document or holding any hearing; b. decide that any Rule does not apply in respect of a proceeding.

81.1 Subject to the requirements of the Insurance Act and the Statutory Powers Procedure Act, the adjudicator may on such terms as he or she considers just: (a) set aside any time limit set out in these Rules for doing any act, serving any notice, filing any document or holding any hearing. (b) decide that any Rule does not apply in respect of a proceeding.¹¹ [Emphasis added]

The only difference between the two rules is the substitution of the word “just” in Rule 81.1 [4th] for the word “appropriate” in Rule 79.1 [3rd]. I do not attach any great import to the different wording. I agree with the arbitrator’s comment in MacKenzie: “I am also not persuaded, despite Mr. MacKenzie’s submissions, that Rule 81 for example, allows me to not apply a Rule just because.”¹² Similarly, I am not satisfied that the arbitrator’s invocation of Rule 81 provided a reasonable basis for her decision.

In conclusion, I find that the purpose of Rule 40 is to simplify the procedures in FSCO arbitrations. Sidestepping the Rule will lead to unnecessary complications. The insurer is entitled to rely on Rule 40, regardless of when the surveillance took place. Of course, the 30 day requirement is a minimum, and arbitrators often require insurers to make the decision earlier, a fact the insurer in this case recognized. However, Rule 40 cannot be simply ignored, and the arbitrator was bound by the appeal decision in Puljic, as there was no basis for her to distinguish it.

For these reasons, I find the arbitrator erred. Since Security National was prepared to indicate within 60 days of the hearing its intention with respect to the surveillance, I have included that in my order.

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.

October 29, 2007

David Evans Director’s Delegate

Date

Footnotes

1. 1The Statutory Accident Benefits Schedule – Accidents on or after November 1, 1996, Ontario Regulation 403/96, as amended.
2. 2Dispute Resolution Practice Code Third Edition – April 15, 1997.
3. 3I allowed Security National to file fresh evidence showing that no surveillance was conducted before mediation in any event.
4. 4Upheld on judicial review, unreported endorsement of the Divisional Court dated September 18, 2007, Court File No. 88/06.
5. 5For example, cases may be distinguishable because of their factual basis or a new interpretive argument not previously made or change in the environment in which the Act or Schedule operates. [footnote in original]
6. 6At p. 10.
7. 7See also Coachman Insurance Company and Hejnowicz, (FSCO P05–00024, August 3, 2006).
8. 8Rules 36.3 and 36.5 [3rd] dealt with witnesses and the equivalent provision is now Rule 41 [4th]. Rule 36.6 [3rd] dealt with court reporters.
9. 9Although the arbitrator referred to Rule 32.2, I assume she meant Rule 32.3.
10. 10MacKenzie, pp. 7–8.
11. 11Rule 81.2 provides that, on agreement, requirements under the Insurance Act and the Statutory Powers Procedure Act may be set aside. Rule 79.2 [3rd] provided the same.
12. 12Page 7.```