Financial Services Commission of Ontario Commission des services financiers de l’Ontario

Neutral Citation: 2008 ONFSCDRS 171 FSCO A04-002670

BETWEEN:

JAMES JOHNSTON Applicant

and

AXA INSURANCE (CANADA) Insurer

REASONS FOR DECISION

Correction made on January 26, 2011, page 11, second paragraph, in accordance with the Dispute Resolution Practice Code and section 21.1 of the Statutory Powers Procedure Act.

Before: Robert Bujold Heard: June 20, 2008, at the offices of the Financial Services Commission of Ontario in Toronto. Appearances: Adam R. Little for Mr. Johnston David Murray for AXA Insurance (Canada)

Issues:

In my decision dated February 8, 2008, I found that Mr. Johnston was entitled to income replacement benefits (“IRBs”) beyond those that had been paid to him by AXA Insurance (Canada) (“AXA”). I also found that Mr. Johnston was entitled to a special award because AXA had acted unreasonably in withholding these additional amounts. I invited the parties to make submissions on the amount of the special award that should be awarded in this case. I received facta and briefs of authorities from both parties and oral submissions were heard, in person, on June 20, 2008.

The parties disagreed on both the maximum permissible amount that could be awarded pursuant to section 282(10) of the Insurance Act, R.S.O. 1990, c.I.8, as amended, as well as the appropriate amount of the special award in this case.

The issues in this hearing are:

1. What is the maximum permissible special award that could be awarded pursuant to section 282(10) of the Insurance Act?

2. What is the appropriate amount of the special award in this case?

Result:

1. The maximum permissible special award that could be awarded pursuant to section 282(10) of the Insurance Act is $754,139.36.

2. Mr. Johnston is entitled to a special award in the amount of $40,000.

3. If the parties cannot agree on entitlement to or the amount of expenses as they relate to this hearing on the quantum of the special award, they may request a determination in accordance with Rule 79 of the Dispute Resolution Practice Code.

THE LAW:

Section 282(10) of the Insurance Act provides as follows:

Special Award

If the arbitrator finds that an insurer has unreasonably withheld or delayed payments, the arbitrator, in addition to awarding the benefits and interest to which an insured person is entitled under the Statutory Accident Benefits Schedule, shall award a lump sum of up to 50 per cent of the amount to which the person was entitled at the time of the award together with interest on all amounts then owing to the insured (including unpaid interest) at the rate of 2 per cent per month, compounded monthly, from the time the benefits first became payable under the Schedule.

The leading case on the proper approach to special awards is Liberty Mutual Insurance Company and Persofsky.¹ The steps set out in Persofsky are as follows:

1. Determine the benefits owing to the insured person, including interest calculated under the applicable version of the SABS;

2. Decide whether the insurer unreasonably withheld or delayed the payment of these benefits. If so, the insurer will be ordered to pay a lump sum amount in addition to the benefits and interest calculated in #1;

3. If the insurer did not act unreasonably in respect of all the benefits owing under #1, determine the amount of the benefits that were unreasonably withheld or delayed, and the interest payable on these benefits under the applicable version of the SABS.

4. Determine the maximum special award that can be awarded under s. 282(10), or at least a reasonable approximation. This is done by taking the amount in #1 or #3, whichever is applicable, and adding the additional interest component in s. 282(10) - two per cent 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. Expressed as a formula, the calculation is as follows:

   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.

7. In the order, express the special award as a specific, lump sum amount. No interest is payable on this amount, except as part of the enforcement process.

On February 28, 2008, AXA paid $549,846.00 ($129,080.53 in benefits, and $420,765.47 in interest) in accordance with my decision of February 8, 2008. There does not appear to be any dispute between the parties as to the calculation of the benefits owing or the calculation of interest pursuant to section 46 of the Schedule.

The dispute arises regarding the calculation of the maximum special award that could be awarded under section 282(10) (step 4 above) and the appropriate amount that should be awarded in this case (step 5 above).

Persofsky does not provide guidance on the calculation of the maximum permissible special award, other than what is set out in step 4.

With respect to the determination of the appropriate special award in step 5, Persofsky offers considerable guidance.

Persofsky recognizes that the purposes of a special award are punishment and deterrence. In furthering these purposes, the amount of a special award should have regard to two overarching principles: rationality and proportionality.

Rationality refers to an amount that is just large enough to meet the purposes of a special award.

Proportionality refers to an amount that is proportional to the misconduct in issue. Specifically, it must be proportional 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) should take into account any other penalties or sanctions that have been or likely will be imposed on the insurer due to its misconduct. Of course, as set out in step 4, the amount must also bear a reasonable relationship to other special awards, and it must not exceed the maximum.

Persofsky notes that Commission decisions have applied many of the relevant considerations which include: the amount of the benefits unreasonably withheld or delayed; the time the benefit is withheld or delayed; failing to respect important obligations under the SABS; other factors that increase the gravity of the insurer’s conduct such as bad faith or the vulnerability of the insured; mitigating factors; and other penalties that may be imposed upon the insurer.

EVIDENCE AND ANALYSIS:

Maximum Permissible Special Award

Mr. Johnston tendered a report prepared by Daniel Edwards of Soberman LLP dated February 19, 2008 setting out Mr. Edwards’ calculation of the maximum permissible special award (the “Soberman report”). AXA tendered a report prepared by Mr. Paul Colangelo of Colangelo Cookson Walker Inc. dated June 16, 2008 in support of its position on the maximum permissible special award (the “CCW report”).

The Soberman report notes that my decision of February 8, 2008 found that payments owing to Mr. Johnston were due from November 20, 2001, although the Insurer’s conduct was not found to be unreasonable until October 21, 2003, i.e. 14 days after the release of the appeal decision in Welsh and Economical Mutual Insurance Co.² As a result of this distinction, Soberman calculates the maximum special award on the basis that interest pursuant to section 46 of the Schedule should be calculated from November 21, 2001 to the date of the decision, February 8, 2008, and special award interest pursuant to section 282(10) of the Insurance Act should run from October 21, 2003 to February 8, 2008.

Using this approach, Soberman calculates the maximum permissible special award at 50% of $1,508,278.72 or $754,139.36.

The CWW report offers two alternate calculations. The calculation described as Scenario 2 calculates the maximum special award in the same manner as Soberman, arriving at a figure of $753,953.92³

In Scenario 1, CWW calculates both section 46 interest and special award interest from the date that AXA’s withholding of benefits was found to be unreasonable, i.e. October 23, 2003, to February 8, 2008. Using this assumption, CWW calculates the maximum permissible special award at 50% of $998,011.69 or $499,005.85.

In support of the Scenario 1 calculation, AXA referred to the decision of Smith and Wawanesa Mutual Insurance Company.⁴ In Smith, Arbitrator Renahan found that IRBs in the approximate principal amount of $37,300 had been unreasonably withheld by Wawanesa. Of that amount, approximately $4,300 represented the amount by which Mr. Smith’s IRBs exceeded $400 per week on account of business losses.

As I note in my decision of February 8, 2008, I concur with Arbitrator Renahan’s observation that “prior to the decision Welsh and Economical Mutual Insurance Company it was arguable that business losses could not increase an income replacement benefit to more than $400 per week.” It was on this basis that I found that AXA had not acted unreasonably when it initially calculated Mr. Johnston’s IRB benefit as capped at $400 per week. However, Arbitrator Renahan continues:

I accept Wawanesa’s argument that Welsh was new information within the meaning of section 32 of the Schedule and that Wawanesa had 30 days to consider this information. Accordingly, the amount of the income replacement benefit which exceeded $400 per week was not overdue until November 7, 2003. The principal amount of $4,312.10 was unreasonably withheld for a period of four months. [emphasis added]

In effect, it was found that the date that the payments in excess of $400 per week were “overdue” and the date that the insurer “unreasonably withheld” payment were one and the same. On this basis, section 46 interest and special award interest on the $4,312.10 were both calculated from the same date, November 7, 2003.

In my decision of February 8, 2008, I drew a distinction between when, on the one hand, the payments for IRBs over $400 per week became overdue and section 46 interest on those payments became payable and, on other hand, when AXA’s withholding of those payments became unreasonable. While those dates may be one and the same, they were not found to be the same on the facts before me. I found that AXA should have had sufficient information to pay Mr. Johnston additional IRB benefits based on his business losses by November 6, 2001. Those payments became “overdue,” and interest thereon therefore payable, 14 days later on November 20, 2001. However, AXA’s failure to make those payments, though wrong, was not found to be “unreasonable” until 14 days after the release of the Welsh decision, i.e. October 21, 2003.

I do not interpret Smith to stand for a blanket proposition that benefits only become due when the withholding of such benefits becomes unreasonable, although that may have been the situation on the facts of that case. To the extent that Smith does stand for that proposition, I respectfully disagree. While there may be some appeal to the argument that both section 46 interest and special award interest should only run from the date that the benefit is found to have been unreasonably withheld or delayed for the purposes of calculating the maximum special award, I find no basis for that interpretation in the wording of section 282(10). The special award interest is to be calculated on “the amount to which the person was entitled at the time of the award together with interest on all amounts then owing to the insured (including unpaid interest).” In my view, the only reasonable interpretation of the phrase “unpaid interest” is interest from the date that the payments became overdue, not interest from the date that the withholding became unreasonable.

I therefore find that the maximum permissible special award in this case is $754,139.36.

I note that the parties agreed that the importance of determining the maximum permissible amount with exactitude increases where the arbitrator seeks to make an award at or near the maximum. For the reasons set out below, that is not the case here. Even if I were to accept AXA’s position on the maximum permissible amount that could be awarded, it would have little, if any, impact on the amount that I find appropriate to award in this case.

Factors affecting the amount of the Special Award in this case

My reasons for granting a special award in this case are set out in my decision of February 8, 2008. Briefly, I found that AXA had acted unreasonably following the release of the appeal decision in Welsh on October 7, 2003. My principal findings as they relate to the unreasonable conduct consist of the following:

• AXA failed to advise Mr. Johnston that eligible business losses could be used to increase the quantum of IRBs beyond $400 per week, even after the law was clarified upon the release of the Welsh decision in October 2003.

• There were unexplained delays of several months and up to a year as AXA adjusted Mr. Johnston’s claim for additional IRBs.

• AXA did not pay additional IRBs based on Mr. Johnston’s business losses from self-employment, even after its own accountant, CWW, estimated in January 2006, on the basis of the information and documentation available, “that Mr. Johnston [was] owed IRBs totalling $252,879 for the period January 1, 2001 to February 26, 2006, before interest.”

I also noted that it was not until CWW generated its estimate of IRBs owing to Mr. Johnston that AXA secured a report from Aktrin Furniture Information Centre (“Aktrin”) purporting to explain Mr. Johnston’s business losses as being the result of a downturn in the economy and the office furniture industry in particular. Aktrin prepared a report dated September 22, 2006, approximately six weeks before the commencement of the hearing. It was also not until approximately 30 days before the hearing, October 4, 2006, that CWW generated the first and only report prepared on the assumption that Mr. Johnston was not self-employed.

On these facts, I concluded as follows:

I do not want to suggest that there is anything particularly improper in AXA’s change of position, either on the issue of Mr. Johnston’s status as self-employed/employed or on the quantum of losses from self-employment. AXA has a right and a duty to continue to adjust the file and assess the relevance and impact of any new information that becomes available. In my view, however, AXA’s conduct does not simply amount to a re-thinking of Mr. Johnston’s entitlement based on new information. AXA’s conduct, or that of its agents, following the appeal decision in Welsh, was at best a half-hearted effort to at first obtain and then proceed with available information and documentation to assess Mr. Johnston’s post-accident income losses from self-employment. Delays of up to several months and nearly a year went largely unexplained.

Later, I continue:

These delays were not only lengthy and unexplained, they were ultimately, in my view, unreasonable. Further, I find that AXA’s conduct evolved from one of unreasonable delay to unreasonable withholding. In fact, AXA seemed determined not to pay an additional IRB benefit to account for post-accident losses, even failing as it did to pay when its own accountant finally arrived at a determination on January 30, 2006.

Referring to the considerations listed in Persofsky, Mr. Johnston emphasized the amount of the benefits withheld ($129,228.33 plus interest of approximately $25,000 to October 21, 2003, being the date the withholding became unreasonable) and the length of the delay (nearly 4.5 years from October 21, 2003 to the date of my decision) in support of his position that “a substantial special award at or near the maximum” would be appropriate in this case.

In further support of his position, Mr. Johnston also pointed to AXA’s failure to respect important obligations under the Schedule. Specifically, Mr. Johnston referred to AXA’s failure to advise him of his entitlement to use business losses to claim IRBs in excess of $400 per week, and its failure to ever pay any IRBs beyond $400 per week – whether after the release of Welsh or after its own accountant, Mr. Colangelo, estimated IRBs owing at $252,879. This latter point was submitted as an aggravating factor under the Persofsky considerations. Mr. Johnston argued that AXA’s refusal to reconsider its position in light of its own accountant’s report demonstrated intransigence.

As a further aggravating factor, Mr. Johnston submitted 7 invoices from the accountants who prepared reports on his behalf, PricewaterhouseCoopers LLP and Soberman LLP, totalling $76,027.56. Mr. Johnston pointed out that over $60,000 related to services rendered after AXA refused to make any payment pursuant to Mr. Colangelo’s report in January 2006. He also pointed out that his maximum recovery at FSCO for 3 expert reports and 3 days of expert attendance at the hearing will leave a shortfall of approximately $65,000.

Mr. Johnston did not recognize any factors that would mitigate against a substantial award.

While stating that it was not trying to reargue entitlement to a special award, AXA countered that any additional IRB payments to Mr. Johnston required AXA to be satisfied both that Mr. Johnston was self-employed and also to be satisfied with the quantification of Mr. Johnston’s post-accident business losses incurred as a result of the accident.

AXA argued that once the matter went to arbitration and was reviewed by AXA’s solicitors, serious doubts arose as to whether Mr. Johnston was properly classified as self-employed. AXA submitted that this was a debatable point that required determination. Further, even if AXA had accepted Mr. Johnston as self-employed, my award was less than what was determined by either the Applicant’s or the Insurer’s accountants and would have resulted in a significant overpayment ($128,607.99) if AXA had paid in accordance with either of these reports; an amount that it may not have been able to recover.

It is difficult to see how this is not, at least in part, a reargument of the entitlement issue, i.e. whether AXA had acted unreasonably in withholding any additional IRB payments; arguments that it could have raised at the hearing. Even so, to the extent that it also speaks to the gravity of AXA’s conduct or delay, I make two observations.

First, I note that AXA’s Response to the arbitration dated January 12, 2005 has attached a Schedule “A” that sets out AXA’s position. Although clearly not a boilerplate response, there is no paragraph that explicitly pleads that Mr. Johnston was not entitled to further payments of IRBs on the basis that he was an employee of his businesses. Also, as noted above, it was not until October 4, 2006 (one month before the commencement of the arbitration) that the one and only report was prepared on the basis that Mr. Johnston was “employed.”⁵ These facts distinguish this case from Ironside and Royal Insurance Company of Canada⁶ cited by AXA.

Second, I do not accept the argument that AXA was justified in not paying additional IRBs, pursuant to its accountant’s report on January 26, 2006, because the accountant's estimate exceeded my award and the excess may not have been recoverable.

As I state in my decision, AXA had an obligation to pay a reasonable approximation of Mr. Johnston’s entitlement. Though much delayed, AXA finally retained Mr. Colangelo to estimate that entitlement. I note that at any point from February 2004, when Mr. Johnston made his claim for additional IRBs, AXA could have investigated the impact, if any, of the economy on Mr. Johnston’s losses and provided that information to Mr. Colangelo. However, AXA secured Mr. Colangelo’s January 2006 report without considering it necessary to investigate economic conditions.

While it’s true that my decision awarded less than Mr. Colangelo had estimated in his January 2006 report, more significant to AXA’s conduct is the fact that AXA only decided to retain an expert in the office furniture sales industry to investigate the potential impact of the economy on Mr. Johnston’s entitlement after it received and was apparently unsatisfied with Mr. Colangelo’s January report. As I found in my earlier decision, AXA seemed determined not to pay an additional IRB benefit.

I do not want this decision, however, to digress into a re-hearing on the issue of entitlement to additional IRBs. I simply note that, while AXA’s actions may not constitute particularly egregious or blameworthy conduct, I do not find that AXA’s reframing of its conduct, at this stage, very persuasive in terms of explaining or ameliorating its delays.

Also on the issue of delay, AXA pointed out that the arbitration was delayed 7 months as a result of an adjournment request by Mr. Johnston to allow for private mediation. In addition, AXA also noted the impact of interest on the maximum amount of the special award, noting $370,397.86 accrued from the commencement of the arbitration to the release of my decision. I accept both of these factors as relevant to the quantum of the special award in this case.

In considering delay, Persofsky specifically notes:

Due to the double interest component in the calculation under s. 282(10), particularly now that interest under the SABS is compounded, the potential size of a special award increases quickly with the passage of time. While timeliness is a high value under the SABS that arbitrators should enforce, arbitrators should take a hard look at the period over which the delay was unreasonable.

Under the heading “Other Penalties,” the Director, as he was then, continues:

Interest has been a matter of some debate. While I agree with the Arbitrator in Graper that interest and special awards are distinct responses, I conclude that the insurer’s obligation to pay interest at the high rate imposed by the SABS may be a factor in assessing the proportionality of the award.

In this case, interest accrued during a 7 month adjournment requested by Mr. Johnston. There was also a period of one year from the conclusion of the hearing to the release of my decision. While the evidence in this case was voluminous and the issues complex, thereby requiring significantly more time than the norm to release my decision, and while the positions taken by AXA at the hearing added to the complexity of the proceeding, I am nevertheless cognizant of the significant interest paid by AXA on the principal amount of the award. As AXA notes, not only has it not gained any advantage, it has paid approximately $100,000 for each year of delay. I am also cognizant of the significant notional interest included in the calculation of the maximum special award.

AXA also noted that it continued to pay benefits to Mr. Johnston throughout, including IRBs at $400 per week. The issue of additional IRBs arising from losses from self-employment was the only issue that generated dispute proceedings. Further, all of the “damage” to Mr. Johnston had occurred by the time the Welsh decision clarified the law. By that time, Mr. Johnston’s businesses had gone bankrupt. In that regard, AXA contended that Mr. Johnston has received a greater return on the benefits than he might otherwise have received in the market and, as the ultimate individuals that suffered were the companies’ creditors, it is arguable that in real financial terms Mr. Johnston is now better off.

While I am not prepared to regard payment of the principal amount found owing to Mr. Johnston on account of additional IRBs, and interest thereon pursuant to the Schedule, as a windfall, I do recognize that AXA’s conduct was not found to be unreasonable until well after Mr. Johnston’s businesses had failed. I further recognize, as far as I was made aware, that the dispute between the parties was limited to this one issue of additional IRBs arising from business losses. In Quarrington and Jevco Insurance Company,⁷ Arbitrator Baltman, as she was then, recognized the payment of other benefits and the fact that the delay did not contribute to further deterioration of the claimant’s condition as mitigating considerations. She also identified the absence of bad faith or malice as a relevant consideration. Though unreasonable, I do not believe that AXA’s conduct constituted bad faith or evidenced malice.

AXA also put forward that it had always been willing to settle this issue evidenced, in part, by the private mediation. I am unable to consider this as a mitigating factor, as I have no evidence on the reasonableness of the positions taken by the parties at mediation or during settlement discussions.

On the issue of Mr. Johnston’s expenses related to his accounting evidence, AXA pointed out that a significant number of entries on the accountant’s invoices concern a related tort action as well as a related LTD matter. More importantly, AXA argued that Mr. Johnston chose his forum, aware that recovery of expenses at FSCO is significantly less than those recoverable through the Courts. I agree with AXA on this point. I also agree with the reasoning of Arbitrator Feldman in Melchiorre and Wawanesa Mutual Insurance Co.⁸:

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.

Proportionality and the Relationship to other Cases

Although Mr. Johnston’s factum submitted that AXA’s conduct warranted a special award at or near the maximum, counsel for Mr. Johnston suggested in oral submissions that $250,000 was an appropriate award. It was noted that this represents less than half of the amount of the principal award with interest ($549,846.00), and less than one-third of the maximum permissible award ($754,139.36).

AXA countered that an award of $10,000 would be appropriate, particularly in light of the ameliorating factors identified above.

As previously stated, the amount of the special award must be rationally related to the purposes of a special award, proportional to the conduct of the insurer and bear a reasonable relationship to the amounts awarded in others cases. Of course, it must also not exceed the maximum permissible amount.

On the issue of proportionality and the relationship to other cases, Mr. Johnston focused on two decisions.

In Smith,⁹ Mr. Johnston noted that Wawanesa had failed to pay proper IRBs although it had evidence that the benefit it was paying was inadequate; it failed to send an accountant to review Mr. Smith’s accounting records; and it failed to promptly follow the Welsh decision to pay an IRB beyond $400 per week. In that decision, Arbitrator Renahan awarded $39,000 which approximated the maximum permissible amount.

Though there may be similarities with the case at hand, AXA contended that the conduct in Smith was much more egregious and pointed to several important differences. First, only a small portion of the amount found to have been unreasonably withheld (approximately $4,300) was on account of additional IRBs, from post-accident business losses, withheld after the Welsh decision. Most of the benefits (approximately $33,000) related to Mr. Smith’s basic entitlement. Second, it was found that Mr. Smith was particularly vulnerable and Wawanesa knew or should have known that its conduct was causing significant harm to Mr. Smith, his family and the business.

Mr. Johnston also relied upon the case of Henderson and Lombard Insurance Company.¹⁰ In Henderson, Arbitrator Sampliner awarded $65,000 or approximately 40% of the maximum permissible award. In that case, “[Lombard] committed serious breaches over a long period of time. Lombard failed to send Mr. Henderson claim forms and information about accident benefits, neglected its duty to evaluate and respond to his claims, delayed answering his queries, misstated the limitation period, and refused to honour his entitlement rights under established precedents.”

Mr. Johnston agreed AXA’s conduct was not as egregious as the conduct of Lombard in Henderson, but seemed to suggest that the percentage of the maximum possible award granted in that case (40%) was instructive for the case at hand.

In my view, Mr. Johnston focused far too heavily on the quantum of the maximum permissible special award in his assessment of the appropriate amount to be awarded, suggesting as he did that 33% of the maximum (or $250,000) was very reasonable in the circumstances of this case.

In Stewart and Liberty Mutual Insurance Company,¹¹ Arbitrator Sapin made the following remarks:

In his Application for Arbitration, Mr. Stewart has asked for a special award of $25,000.

Were I to follow the method as set out in Persofsky and applied in Smith, I expect the maximum interest payable under subsection 282(10) in the case before me would amount to several hundred thousand dollars. Mr. Stewart’s suggested special award of $25,000, hardly a nominal amount, would translate to a fairly modest percentage of the total payable under subsection 282(10). I find the “percentage” method is not helpful in this case.

In my view, however, a special award of $25,000, inclusive of interest, is appropriate. It represents a sufficiently serious penalty to impose upon Liberty for its conduct under the circumstances, and for its part in the delayed payment of the spousal death benefit.

Mr. Johnston submitted that Stewart misapprehended the importance of the maximum amount of the special award in arriving at an amount that is proportional to blameworthiness of the insurer’s conduct. I disagree. In my view, Stewart not only arrived at an appropriate award in that case, but the reasoning is well supported by both Persofsky and the more recent appeal decision in Wawanesa Mutual Insurance Company and Michalski.¹²

The maximum permissible award is a product of the amount of the benefits withheld and the length of the delay. Persofsky recognizes that these factors are important considerations in fixing the size of the award. However, Persofsky also notes that “refusal of a large claim is not necessarily more blameworthy than a small, but essential claim.” Persofsky is also very clear that the appropriate amount of the special award should be determined as a lump sum, not a percentage.

While the amount of the benefits withheld, the length of the delay, and the other factors listed in Persofsky may lead to the conclusion that a sanction at the higher end of the scale is appropriate, the absolute dollar amount of any special award must still be proportionate to the insurer’s conduct and awards made in other similar cases. The fact that a special award may compare favourably with other similar cases when stated as a percentage does not, in my view, justify an award which is disproportionate to those cases when stated as a dollar amount.

Michalski is a case in point. In Michalski, the hearing arbitrator awarded $150,000 of a maximum permissible special award of $179,000.¹³ Although taking a somewhat more generous view of the insurer’s conduct, the Director’s Delegate, on appeal, agreed that a “substantial special award was warranted.” Nevertheless, after referring approvingly to the Stewart decision, the Director’s Delegate found as follows:

The arbitrator here treated the “high end of the scale” as referring to the percentage of the maximum that was awarded instead of the actual dollar amounts of the special awards. She also took as her starting point the highest previous awards, instead of looking at the context of special awards in general. The award she made then far exceeded any other special award granted.

The Director’s Delegate continues: “the arbitrator erred in calculating the amount by focusing on the percentage aspect and by arriving at an award that was disproportionate.” He then concludes:

It is difficult to see why the special award in this case should be more than twice as large as the one in Henderson, considering that Wawanesa paid at least some benefits throughout and, even excluding the portion of the payments it made for which it does not get credit, paid over 40 percent of the total attendant care claimed prior to the hearing.

In my view, a special award of no more than $50,000 can be justified. I have reduced the special award accordingly.

AXA introduced a list of 105 special award cases decided at FSCO. The awards range from a low of $40 to a high of $65,000 in Henderson. The vast majority of the awards are under $10,000, although the list submitted does not set out the maximum special award that could have been awarded in each case. It is not clear, therefore, how many of these awards may have been limited by the maximum special award that could be awarded by the arbitrator.

Although the list provides some guidance, I find cases such as Henderson and Michalski, where the maximum permissible award did not override or significantly factor in the actual amount awarded, more helpful in providing comparators of special awards in other similar cases.

In my view, and for the reasons stated above, AXA’s conduct was not as egregious as the conduct in Smith or Henderson or, for that matter, Michalski. Notwithstanding the very high maximum permissible special award in this case, I am unable to justify an award in the same range as Henderson which represents the highest special award issued at FSCO to date.

With due consideration of the various factors outlined in Persofsky, including the overarching purposes of punishment and deterrence, I find $40,000 to be the appropriate amount of the special award in this case. The award is significant, both in absolute terms as well as relative to the lump sums awarded in other similar cases, while recognizing that AXA’s conduct was not so blameworthy as to attract a special award at the highest end of the scale of amounts previously awarded at FSCO.

EXPENSES:

If the parties cannot agree on entitlement to or the amount of expenses as they relate to this hearing on the quantum of the special award, they may request a determination in accordance with Rule 79 of the Dispute Resolution Practice Code.

October 23, 2008

Robert Bujold Arbitrator

Date

Financial Services Commission of Ontario Commission des services financiers de l’Ontario

Neutral Citation: 2008 ONFSCDRS 171 FSCO A04-002670

BETWEEN:

JAMES JOHNSTON Applicant

and

AXA INSURANCE (CANADA) Insurer

ARBITRATION ORDER

Under section 282 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

1. AXA shall pay to Mr. Johnston a special award in the amount of $40,000.

2. If the parties cannot agree on entitlement to or the amount of expenses as they relate to this hearing on the quantum of the special award, they may request a determination in accordance with Rule 79 of the Dispute Resolution Practice Code.

October 23, 2008

Robert Bujold Arbitrator

Date

Footnotes

1. 1Liberty Mutual Insurance Company and Persofsky (FSCO P00-00041, January 31, 2003)
2. 2Welsh and Economical Mutual Insurance Co. (FSCO P02-00024, October 7, 2003) appeal
3. 3There is a nominal difference of $185.44 between the Soberman figure and CWW’s Scenario 2 figure. The reason for this small discrepancy is not given.
4. 4Smith and Wawanesa Mutual Insurance Company (FSCO A02-001475, May 28, 2004 and August 20, 2004)
5. 5It was accompanied by an extensive report of same date that set out various scenarios for the calculation of IRBs based on the assumption that Mr. Johnston was “self-employed.”
6. 6Ironside and Royal Insurance Company of Canada (FSCO A97-001143, January 19, 1999)
7. 7Quarrington and Jevco Insurance Company (OIC A-010804, July 17, 1995)
8. 8Melchiorre and Wawanesa Mutual Insurance Co. (FSCO A05-000491 and A05-000492, April 20, 2007)
9. 9Supra, see footnote 4.
10. 10Henderson and Lombard Insurance Company (FSCO A97-001019, March 31, 2000)
11. 11Stewart and Liberty Mutual Insurance Company (FSCO A03-000833, November 16, 2004)
12. 12Wawanesa Mutual Insurance Company and Michalski (FSCO P06-00003, December 5, 2007) appeal
13. 13The maximum permissible amount was revised on appeal to $176,000.