Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2007 ONFSCDRS 78

FSCO A05-000491 and FSCO A05-000492

BETWEEN:

IRMA MELCHIORRE ON HER OWN BEHALF AND AS ADMINISTRATRIX FOR THE ESTATE OF ALBERTO MELCHIORRE

Applicants

and

WAWANESA MUTUAL INSURANCE COMPANY

Insurer

REASONS FOR DECISION ON AMOUNT OF SPECIAL AWARD

Before:

Richard Feldman

Heard:

By written submissions received on January 22, February 8 and February 16, 2007

Appearances:

Amin Sachedina for the Applicants

Ian D. Kirby for Wawanesa Mutual Insurance Company

Introduction:

In my decision issued on December 22, 2006, I found that the estate of Alberto Melchiorre was entitled to funeral benefits in the amount of $6,000.00¹ and that Irma Melchiorre was entitled to death benefits in the amount of $25,000.00². I also found that both Applicants were entitled to a special award because of the unreasonable refusal by Wawanesa to pay these benefits, but I reserved my decision on the amount so that the parties could provide written submissions with respect to this issue.

Issues:

The issues to be determined are:

With respect to the estate of Alberto Melchiorre

1. What is the appropriate special award to grant to the estate of Alberto Melchiorre?

With respect to Irma Melchiorre

1. What is the appropriate special award to grant to Irma Melchiorre?

Result:

With respect to the estate of Alberto Melchiorre

1. The estate of Alberto Melchiorre is entitled to a special award in the amount of $10,000.00.

With respect to Irma Melchiorre

1. Irma Melchiorre is entitled to a special award in the amount of $40,000.00.

THE LAW:

The proper approach to special awards under s. 282(10) of the Insurance Act was set out by the Director of Arbitrations in Liberty Mutual Insurance Company and Persosfsky (FSCO Appeal Order P00-00041, January 31, 2003) as follows:

1. Determine the benefits owing to the insured person, including interest calculated under the Schedule;

2. Decide whether the insurer unreasonably withheld or delayed the payment of these benefits;

3. If not all benefits were unreasonably withheld or delayed, determine the amount of the benefits that were unreasonably withheld or delayed;

4. Determine the maximum award that can be awarded under s. 282(10), or at least a reasonable approximation. This is done by taking the amount determined under #1 or #3 (whichever is applicable) and adding the additional interest component in s. 282(10) - two percent per month, compounded monthly. To be clear, this calculation includes interest on the unpaid SABS interest. The maximum special award is 50 per cent of this total.

Maximum Special Award = 50% x (benefits that were unreasonably withheld or delayed + interest on these benefits calculated under the SABS + compound interest calculated according to s. 282(10));

5. Consider all relevant factors (discussed below) to determine an appropriate lump sum special award, not a percentage, that responds to the facts of the case and bears a reasonable relationship to other special awards, and does not exceed the maximum;

6. Provide reasons for concluding that the special award is payable, and for the amount of the award; and

7. In the order, express the special award as a specific, lump sum amount.

The award must be proportionate to: (i) the blameworthiness of the insurer's 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.³ 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.⁴

Special awards at or near the higher end of the permissible range are reserved for cases where the insurer's conduct has been egregious and where there are no mitigating factors.⁵ Aggravating factors that tend to increase the amount of the special award include evidence that the insurer has: flagrantly disregarded its obligations to the insured person, acted in bad faith or callously adopted an approach that is intended to give the insurer a tactical advantage.⁶ Adopting an "immoderate, stubborn and inflexible attitude throughout the handling" of the claim can amount to flagrant misconduct.⁷

One must consider the conduct of the insurer throughout the claims process to determine whether in light of the circumstances, as they then existed, the insurer acted fairly and promptly in responding to the claim.⁸ An insurer is responsible for the decisions made by the staff it hires, trains and supervises.⁹

Finally, the amount ordered against an insurance company under this heading must be large enough to further the goals of punishment and deterrence.¹⁰ 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.¹¹

SUBMISSIONS:

The Applicants submit that Wawanesa's handling of these claims was egregious and that it has demonstrated bad faith towards the Applicants by failing to treat the Applicants fairly and: by failing to apply the correct legal test; by failing to properly investigate into, gather and weigh the information that was readily available at that time; by allowing others at Wawanesa, whose obligations potentially conflicted with those of the accident benefits adjuster, to participate in the decision as to whether Wawanesa would pay the accident benefits claimed; and, by continuing to deny these claims without assessing new information as it was received. Based upon this conduct, the lack of mitigating factors, the length of time the benefits have been withheld, the impact upon Irma Melchiorre, the need for deterrence and the fact that the Applicants can only recover a fraction of their actual legal expenses under the Commission's Expense Regulation, the Applicants are seeking the maximum possible special award.

Wawanesa seems to suggest in its written submissions that since the physical evidence was "equivocal" with respect to the question of whether the van in question struck Mr. Melchiorre it was a "close case" and, thus, any special award granted should be nominal (i.e. not exceeding $5,000). The Insurer also points out that in my earlier decision on this case, I did not explicitly make a finding that the Insurer had engaged in "flagrant misconduct" or had acted in "bad faith."

EVIDENCE AND ANALYSIS:

Summary of Reasons for Granting a Special Award in This Case

I provide detailed reasons for granting a special award in my decision of December 22, 2006. At page 31 of that decision, I summarize those reasons as follows:

From the evidence presented, it appears to me that the individuals at Wawanesa responsible for handling these claims for accident benefits made little honest effort to investigate the matter, ignored information that tended to support the claim (such as the police accident report), came to a hasty decision not supported by any reliable evidence, were primarily concerned with protecting the person they perceived to be their insured (Mr. DeBenedictis) and refused or neglected to ever reassess the validity of the claim as new information was received.

Amount of Benefits and Length of Time Benefits Withheld

On her own behalf, Irma Melchiorre claimed death benefits in the amount of $25,000 and, on behalf of the estate of her late husband, she claimed funeral benefits (maximum payable under the Schedule, $6,000). Wawanesa received these claims on September 10, 2003 and, as of the conclusion of the hearing on October 5, 2006, more than three years later, Wawanesa had still not paid these benefits.

Aggravating and Mitigating Factors

The Insurer's position, as set out in its written submissions, is that the evidence in this case was not conclusive that the use by Mr. DeBenedictis of his van on December 1, 2002 caused the injuries to Mr. Melchiorre that, a few days later, led to his death. As I stated in my decision of December 22, 2006, although some of the physical evidence was equivocal, the evidence when taken as a whole was clearly sufficient to establish, on a balance of probabilities, that Mr. Melchiorre's death was a direct result of injuries he sustained when he came into contact with the van in question. In any event, the testimony of Wawanesa's adjuster made it clear that Wawanesa had little interest in actually gathering or considering the available evidence in this case or in taking any other steps that would be reasonable in the adjusting of these claims; Wawanesa appears to have been more interested in protecting its own interests and those of its client, Mr. DeBenedictis, than it was in properly assessing these claims for accident benefits.

I find that Wawanesa was wilfully blind to the evidence that supported these claims because it failed to gather or consider information that was available to it. I also find that Wawanesa adopted an adversarial, tactical approach to the handling of these claims. Wawanesa's current argument is tantamount to saying, "If we had done our job properly in the first place, we might have come to the same conclusion anyway (since some of the evidence was equivocal) and, thus, our decision was not really all that unreasonable." In my view, this is not a mitigating factor.

Furthermore, no payments were ever made by Wawanesa to the Applicants and the Applicants were forced to proceed with these applications for arbitration. To this extent, the behaviour of Wawanesa is more blameworthy than that of the insurer in Graper and Liberty Mutual¹² in which the benefits that had been withheld were paid by the insurer shortly before the hearing of that case.

Wawanesa has adduced no evidence to suggest that the denial of these claims was due to any conduct on the part of the Applicants in failing to provide information under s. 33 of the Schedule.¹³

The Applicants argued that an aggravating factor was the vulnerability of Irma Melchiorre and the impact the denial of these claims has had on her. No evidence, however, was adduced at the hearing to support these assertions.

The Applicants argued that the fact that they cannot recover 100% of their actual legal costs associated with this arbitration ought to be factored into the quantum of the special award. The Applicants provided no authority for this proposition. In any event, the fact that a successful applicant will typically not recover 100% of their legal expenses related to an application is true in virtually every case that comes before the Commission and I do not see that as an "aggravating" factor. Also, the issues of entitlement to and the quantum of expenses have not yet been determined in this case.

Unlike most other cases in which a special award has been granted, the present case is related to claims for funeral expenses and death benefits. One might assume that the withholding of death benefits and funeral expenses would be less likely to have a devastating impact than the improper withholding of treatment or periodic benefits (such as payments for attendant care or income replacement benefits) but no evidence was adduced by either side in this dispute as to the impact of Wawanesa's denial upon the Applicants so I have no factual basis upon which to conclude that the nature of the benefits that were withheld is either a mitigating or an aggravating factor.

The blameworthiness of the insurer's conduct is one of the factors that must be considered in deciding what amount of special award is proportionate in the circumstances. Some of the conduct on the part of the Insurer in this case that is particularly blameworthy (and which is more fully described in my decision of December 22, 2007) includes the following:

8. Ignoring the police accident report which stated that the van driven by Mr. DeBenedictis struck Mr. Melchiorre, knocking him to the ground;

9. Failing to interview witnesses with first-hand information or to obtain and/or give due consideration to statements such witnesses had made to the police;

10. Failing to obtain opinions from any of the experts involved such as the police investigators or the pathologist;

11. Allowing the head of Wawanesa's Bodily Injury unit to influence the decision as to whether or not accident benefits would be paid; and

12. Refusing to reconsider its position as new information was received after the initial denial of these claims.

In short, Wawanesa failed to treat the Applicants fairly throughout the claims process and adopted an immoderate, stubborn and inflexible attitude throughout the handling of the claim.

For the purposes of determining whether or not a special award was merited, it was sufficient in my earlier decision to simply conclude that Wawanesa's refusal to pay these claims was unreasonable. For the purposes of determining the appropriate quantum of the special award, I also find that the manner in which Wawanesa handled these claims constituted a flagrant breach by Wawanesa of its obligations under the Schedule which merits the granting of a substantial special award.

In fact, there is virtually nothing redeeming about VJawanesa's handling of this file. The only thing that can be said on behalf of Wawanesa is that there is no evidence of malice on its part.

Comparison to Other Cases in which Special Awards Have Been Granted

Wawanesa relies upon three cases¹⁴ in which nominal special awards were granted (of between $2,500 and $5,000). In each of these cases it was specifically held that there was no evidence of flagrant misconduct or bad faith or other egregious conduct on the part of the insurer. While I have taken these cases into consideration, I find them to be of limited value to me for the following reasons:

1. The facts of the cases relied upon by Wawanesa are distinguishable from the facts of the present case;

2. In the present case, I have found that Wawanesa's conduct in the handling of the Applicants claims was egregious and highly blameworthy;

3. These decisions were issued prior to the decision of the Director of Arbitrations in Liberty Mutual Insurance Company and Persosfsky (FSCO Appeal Order P00-00041, January 31, 2003) and may not comply with the current methodology mandated by that decision;

4. In my view, an award of $2,500 to $5,000 is unlikely to have the deterrent effect intended by s. 282(10) of the Insurance Act.

The present case is more similar to Smith and Wawanesa Mutual Insurance Company ("Smith"),¹⁵ in which (amongst other things) the insurer ignored reliable information that was available and failed to take the steps necessary to properly investigate the matter. There were no mitigating circumstances and the Commission awarded the maximum special award permissible in that case ($39,900).

In Graper and Liberty Mutual ("Graper"),¹⁶ Arbitrator Makepeace (as she then was) strongly disapproved of the insurer's denial of benefits when the insurer knew (as evidenced by an internal memo) that the applicants claim was likely to succeed, stating:

"The Insurers adversarial, tactical approach to Mr. Graper's claim has no place in an accident benefits scheme premised on early resolution of disputes between insured persons and first-party insurers."¹⁷(emphasis added)

In Graper, the maximum special award that could have been granted was approximately $40,000. Because of the insurer's selective reading of the evidence, its intransigence in the face of evidence supporting the claim, the length of the delay in paying the benefits in question and the insurer's attempt to gain an unfair advantage through its denial of the benefits, the Arbitrator determined that a very substantial special award was warranted. However, the Arbitrator found that lack of malice on the part of the insurer and the fact that the insurer had reinstated all benefits shortly before the hearing were mitigating factors. In all of the circumstances, the Arbitrator found the appropriate special award in that case to be $25p00.¹⁸

In Singh and Commercial Union Assurance Company ("Singh"),¹⁹ the insurer terminated income replacement benefits without having a sufficient basis for that decision and failed or refused to reconsider its position as it received additional information that showed that the applicant was entitled to such benefits. Notwithstanding that it paid the benefits that had been withheld on the eve of the hearing, because of the insurer's immoderate, stubborn and inflexible attitude throughout the handling of this claim, the Commission awarded the maximum special award of almost $62,000. This decision was upheld on appeal.²⁰

In Henderson and Lombard General Insurance Company of Canada ("Henderson),²¹ a special award was granted in the amount of $65,000 (about 40% of the maximum possible special award) because the insurer unreasonably withheld or delayed paying income replacement and rehabilitation benefits. Arbitrator Sampliner indicated that he may have granted a greater award but for the fact that the insurer had mitigated the situation by making substantial payments to the applicant.

In Mcchalskf and Wawanesa Mutual Insurance Company ("Michalski")/²²Wawanesa was ordered to pay a special award of $150,000 (out of a possible maximum amount of $179,140.46) for, amongst other things, failing "to act with sound and moderate judgment in reassessing evidence' (p. 4). Arbitrator Alves found that the fact that Wawanesa had paid some benefits to the applicant was a mitigating factor in this case but that the insurer's numerous and persistent breaches of its obligations under the Schedule were aggravating factors.

Finally, in Thangarasa and Gore Mutual Insurance Company ("Thangarasa"),²³ Arbitrator Wilson was highly critical of the insurer for ignoring the majority of reports that favoured the applicant and relying exclusively on those few that favoured the insurer's position. He found that, by ignoring consistent, credible evidence that supported the applicant's ongoing disability, the insurer was being wilfully blind. He found that the fact that there was some factual basis (DAC reports and the applicants own statements) upon which the insurer could reach the conclusion it had constituted mitigating factors that justified reducing the quantum of the special award to approximately 85% of the maximum permissible. The special award granted in this case was $39,295.

Like the Smith, Graper, Singh, Michalskiand Thangarasa cases, Wawanesa in this case denied these claims based on insufficient and unreliable information, chose to ignore reliable evidence that supported the claims and failed or refused to reconsider its position as new evidence became available. I find that Wawanesa adopted a stubborn, inflexible and immoderate approach.

I also find that Wawanesa took an adversarial and "tactical" approach to the adjusting of this file and based its decision to deny these claims, at least in part, on improper considerations, in breach of its duty of fairness to the Applicants. Just as in the Graper case, this is an aggravating factor.

In Graper, the benefits were withheld for approximately 90 weeks. In this case, the benefits in question had (at the conclusion of the hearing) been withheld for approximately 160 weeks.

In Graper, Henderson and Mi'chalskf, the Commission found that it was a mitigating factor that each of the insurers had paid at least some benefits to the respective applicants prior to the commencement of the hearing. In the present case, Wawanesa never paid any benefits to the Applicants up to the conclusion of the hearing.

In Graper, it was found that the absence of malice on the part of the insurer was a mitigating factor. Similarly, there is no evidence in the present case that Wawanesa acted out of malice.

The Need for Deterrence

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.

With respect to the claim related to the funeral expenses, the maximum funeral expense that can be claimed under the Schedule (and the amount granted in this case) is $6,000. Therefore, the maximum permissible special award related to a funeral expense that has been unreasonably withheld or delayed will, in absolute terms, be a relatively small sum. In such cases, 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.²⁴

The amount suggested by Wawanesa in this case (i.e., an amount not exceeding $5,000) would likely have no deterrent effect whatsoever. From the written submissions received, there also seems to be no recognition by Wawanesa that there are two distinct claims being advanced by different parties and that each party is entitled to a separate special award.

It is unclear to me whether even the maximum permissible special awards in this case would actually serve as a financial deterrent to Wawanesa or any other insurer. 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.

Maximum Special Award Possible in this Case

Pursuant to the formula set out in the Persofsky decision, I tentatively calculated the maximum special award that could be granted with respect to the funeral benefits as being $12,664.84 and the maximum special award that could be granted with respect to the death benefits as being $52,770.15 (see page 32 of the reasons to my order of December 22, 2006). Mr. Sachedina, on behalf of the Applicants, agrees with these figures. Wawanesa has challenged these figures solely on the basis that "there is no authority for awarding 'interest on interest'" (para. 3 of the Insurers written submissions). No authority is provided by the Insurer to support this position and its interpretation flies in the face of the express direction of the Director of Arbitrations in Persofsky. Based upon the foregoing, I therefore find that the maximum special award that can be granted to the estate of Alberto Melchiorre with respect to the funeral benefits is $12,664.84 and the maximum special award that can be granted to Irma Melchiorre with respect to the death benefits is $52,770.15.

CONCLUSION:

In conclusion, although there is no actual evidence of malice on the part of Wawanesa, for the reasons provided above, I find that its handling of this matter merits the granting of a special award approaching the maximum amount permissible under the Insurance Act. The blameworthiness of the Insurer's conduct in this case is exacerbated by its wilful blindness, by its immoderate, stubborn and inflexible attitude and by the adversarial, tactical approach it adopted in the handling of these claims.

Bearing in mind the "proportionality" approach and the facts set out above, in all of the circumstances of this case (including the length of time the benefits were withheld, the amount of the benefits that were withheld, the blameworthiness of VJawanesa's conduct, the need for deterrence, the aggravating factors previously described, the lack of any mitigating factors other than an absence of malice and the special awards that have been granted in comparable cases), I find the appropriate lump sum amount of the special award that Wawanesa ought to pay to the estate of Alberto Melchiorre is $10,000.00 and the appropriate lump sum amount of the special award that Wawanesa ought to pay to Irma Melchiorre is $40,000.00.

EXPENSES:

At the conclusion of the hearing on October 5, 2006, the parties asked that I defer the issue of entitlement to expenses of this arbitration. 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, 4^th Edition.

April 20, 2007

Richard Feldman Arbitrator

Date

Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2007 ONFSCDRS 78

FSCO A05-000491 and FSCO A05-000492

BETWEEN:

IRMA MELCHIORRE ON HER OWN BEHALF AND AS ADMINISTRATRIX FOR THE ESTATE OF ALBERTO MELCHIORRE

Applicants

and

WAWANESA MUTUAL INSURANCE COMPANY

Insurer

ARBITRATION ORDER

Under section 282 of the Insurance Act, R.S.O. 1990, c.1.8, as amended, it is ordered that:

1. Pursuant to subsection 282(10) of the Insurance Act, Wawanesa shall pay to the estate of Alberto Melchiorre a special award in the amount of $10,000.00.

2. Pursuant to subsection 282(10) of the Insurance Act, Wawanesa shall pay to Irma Melchiorre a special award in the amount of $40,000.00.

3. If the parties cannot agree on the issue of entitlement or amount of expenses of this arbitration proceeding, they may request a determination of these issues in accordance with Rule 79 of the Dispute Resolution Practice Code, 4^th Edition.

April 20, 2007

Richard Feldman Arbitrator

Date

Footnotes

1. 1Plus interest which, as of the October 5, 2006 (the last day of the hearing), totalled approximately $6,000.
2. 2Plus interest which, as of October 5, 2006, totalled approximately $26,000.
3. 3Liberty Mutual Insurance Company and Persofsky (FSCO Appeal P00-00041, January 31, 2003) at 31 and 32.
4. 4Liberty Mutual Insurance Company and Persofsky (FSCO Appeal P00-00041, January 31, 2003) at 32 and 33.
5. 5Bibby 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 Appeal P99-00044, September 8, 2000) at 22; Graper and Liberty Mutual Fire Insurance Company (FSCO A00-000133, July 20, 2001) at 46.
6. 6Smith and Wawanesa Mutual Insurance Company (FSCO A02-001475, August 20, 2004) and Graper and Liberty Mutual Fire Insurance Company (FSCO A00-000133, July 20, 2001).
7. 7Singh and Commercial Union Assurance Company (FSCO A99-001160, September 11, 2001) at 44-45.
8. 8Clarfield v. Crown Life Insurance Co. 2000 CanLII 29045 (ON SC), [2000] O.J. No. 4074 (Ont. S.C.J.), at para. 31.
9. 9Clarfield v. Crown Life Insurance Co. 2000 CanLII 29045 (ON SC), [2000] O.J. No. 4074 (Ont. S.C.J.), at para. 72.
10. 10but no larger than is needed to serve that purpose: Liberty Mutual Insurance Company and Persofsky (FSCO Appeal P00-00041, January 31, 2003) at 31, adopting the approach from Whiten v. Pilot Insurance Company, 2002 SCC 18, [2002] S.C.J. No. 19.
11. 11Liberty Mutual Insurance Company and Persofsky (FSCO Appeal P00-00041, January 31, 2003) at 31.
12. 12(FSCO A00-000133, July 20, 2001).
13. 13As Wawanesa used as an argument to reduce the amount of the special award made against it in Wawanesa Mutual Insurance Company and Sorokin (FSCO Appeal P04-00008, August 9, 2005).
14. 14Bibby and Pilot Insurance Company (OIC A-009742, December 22, 1995); Brait and Allstate Insurance Company of Canada (OIC A96-000786, July 23, 1997); and Rudar and Lombard General Insurance Co. of Canada (OIC A97-000629, June 12, 1998).
15. 15(FSCO A02-001475, August 20, 2004).
16. 16(FSCO A00-000133, July 20, 2001).
17. 17Graper and Liberty MutualFire Insurance Company (FSCO A00-000133, July 20, 2001) at p. 47.
18. 18Grapeer and Liberty MutualFire Insurance Company (FSCO A00-000133, July 20, 2001) at p. 47.
19. 19(FSCO A99-001160, September 11, 2001).
20. 20Commercial Union Assurance Company and Singh (FSCO Appeal Order P01-00042, June 12, 2002).
21. 21(FSCO A97-001019, March 31, 2000).
22. 22(FSCO A03-001363, August 10, 2006).
23. 23(FSCO A02-001360, August 9, 2005).
24. 24Pafco Insurance Company Limited and Langdon (FSCO Appeal P02-00017, July 17, 2003) at p. 17.