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

Neutral Citation: 2009 ONFSCDRS 177

FSCO A07-000909

BETWEEN:

LJILJANA GARIC

Applicant

and

MARKEL INSURANCE COMPANY OF CANADA

Insurer

Before: Robert Bujold

Heard: May 12 and 13, 2009, in Hamilton, Ontario. Oral submissions heard by telephone conference on August 7, 2009.

Appearances: Allen Wynperle for Mrs. Garic J. Claude Blouin for Markel Insurance Company of Canada

Issues:

The Applicant, Ljiljana Garic, was injured in a motor vehicle accident on July 11, 2006. She applied for and received statutory accident benefits from Markel Insurance Company of Canada (“Markel”), payable under the Schedule.¹ Mrs. Garic disputed the quantum of her weekly income replacement benefit (“IRB”) that Markel initially calculated at $183.84 per week based on the report of its accountant, Mr. Ralph Frattaroli (then of Williams & Partners), dated September 26, 2006. Mrs. Garic maintained that she was entitled to IRBs at the rate of $400.00 per week. The parties were unable to resolve their dispute through mediation, and Mrs. Garic applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended, by Application for Arbitration dated April 30, 2007.

In February 2008, Markel discontinued paying IRBs on the basis that Mrs. Garic had failed to respond to a section 33 request for information and documentation necessary to update the quantum of any IRBs still payable to Mrs. Garic. The section 33 request had been preceded by requests for information and documentation from Mr. Frattaroli.

Markel received substantially all of the documentation it had requested under cover of correspondence from Mrs. Garic’s counsel, Mr. Wynperle, dated June 6, 2008. The documents were forwarded to Mr. Frattaroli for an updated report on the quantum of any IRBs payable to Mrs. Garic. Markel did not resume payment of IRBs pending Mr. Frattaroli’s report, nor did Markel pay any amounts that had been withheld during the period of alleged non-compliance.

By report dated August 22, 2008, Mr. Frattaroli provided his updated calculation of the quantum of the IRBs payable to Mrs. Garic for the period July 12, 2006 to December 31, 2007.² In arriving at his calculation, Mr. Frattaroli allocated 50% of the post-accident net income from Garic Haulage to Mrs. Garic (as the Garics had done pre-accident). On that basis, Mr. Frattaroli calculated the quantum of the weekly IRB payable to Mrs. Garic for the period July 12, 2006 to December 31, 2007 to be nil. Therefore, not only was Mrs. Garic not entitled to any further payment of IRBs, but Markel took the position that Mrs. Garic had been overpaid $15,442.56 for the period from July 18, 2006 to February 27, 2008 (when IRB payments ceased pursuant to section 33).

Mrs. Garic relied on her own accounting evidence, prepared by Brent Pyper C.A. of Durward Jones Barkwell & Company LLP, in support of her position that she is entitled to IRBs in 2006 of $350.55 per week and $358.92 per week in 2007. The primary difference between the approach taken by Mr. Pyper and Mr. Frattaroli is that Mr. Pyper did not allocate 50% of Garic Haulage’s net income in the post-accident period to Mrs. Garic. Instead, Mr. Pyper accepted the 0% net income allocation for the last half of 2006³ and the 5% allocation for 2007 that the Garics’ bookkeeper, Mr. Aram Jamkodjian, had assigned for tax purposes in those years. Mrs. Garic maintained that, while a 50% allocation of Garic Haulage’s net income was fair and appropriate based on the extensive and relatively equal contributions by the Garics in the pre-accident period, Mrs. Garic’s contribution to the business post-accident was much diminished, and the 0% and 5% allocations in 2006 and 2007 better represented her contribution and her true financial situation.

The parties agreed that the primary issue before me is the appropriate amount of post-accident income that should be allocated to Mrs. Garic from the net income of Garic Haulage. As the financial documents tendered in evidence are largely limited to 2007 and earlier, the parties requested that I decide the quantum of IRBs payable to Mrs. Garic for the period July 12, 2006 to December 31, 2007. The parties also agreed that, since the dispute is focussed on the appropriate way to treat post-accident income generated by Garic Haulage vis-à-vis Mrs. Garic, my decision should provide the guidance necessary to determine the quantum of IRBs payable to Mrs. Garic, if any, in subsequent periods.

Mrs. Garic is also pursuing a special award arising from Markel’s decision to discontinue payment of IRBs in February 2008 pursuant to section 33 of the Schedule. Mrs. Garic maintained that it was not open to Markel to engage section 33 when quantum of IRBs was already the subject of an arbitration proceeding. Markel submitted that it is beyond this proceeding to address whether payments were unreasonably withheld in 2008, as I have only been asked to deal with the amount of IRBs payable between July 2006 and December 2007. In any event, Markel denies that it acted unreasonably. The positions of the parties and their alternative arguments are dealt with more fully below.

With respect to the overpayment issue, I note that Markel’s claim for repayment did proceed to mediation and was added to this proceeding, but the parties agreed to bifurcate the hearing and deal with the repayment issue in a subsequent hearing, if the issue remained to be resolved after I render my decision on quantum.

In summary, the issues in this hearing are:

What is the amount of the weekly income replacement benefit payable to Mrs. Garic for the period from July 12, 2006 to December 31, 2007?
Is Mrs. Garic entitled to a special award for payments unreasonably withheld, pursuant to section 282(10) of the Insurance Act, R.S.O. 1990, c. I.8?
Is either party entitled to their expenses of the arbitration?

Result:

The weekly income replacement benefit payable to Mrs. Garic for the period from July 12, 2006 to December 31, 2007 shall be determined in accordance with these reasons.
Markel shall pay to Mrs. Garic income replacement benefits of $183.84 per week from June 6, 2008 to August 22, 2008, with interest thereon, and a special award in the amount of $750.00.
If the parties cannot agree on entitlement to or the amount of expenses, either party may request a determination in accordance with Rule 79 of the Dispute Resolution Practice Code.

Procedural Ruling

I made several procedural rulings during the course of the hearing. I indicated to the parties that I would set out my reasons for excluding the Master Business Licence for Garic Haulage which Mrs. Garic sought to mark as an exhibit subsequent to the hearing.

The Master Business Licence for Garic Haulage is referred to as a document that Mr. Frattaroli received and reviewed in connection with his initial report of September 26, 2006. The report states that the effective date of the Master Business Licence is February 19, 2002 suggesting that Mr. and Mrs. Garic operated Garic Haulage for a period of a few months before the business license was registered. I do not see that anything turns on this fact.

Counsel for Mrs. Garic suggested that the importance of tendering this document into evidence and marking it as an exhibit did not become apparent to him until he reviewed Mr. Frattaroli’s file in greater detail following the conclusion of the hearing. On that point, I make two observations. First, Mr. Frattaroli’s file was provided to counsel for Mrs. Garic prior to Mr. Frattaroli giving his evidence. Admittedly, Mr. Frattaroli’s complete file was not provided until the morning that he gave evidence, but the file was not voluminous. More importantly, the document originated from Mrs. Garic and was provided to Markel in connection with its adjustment of her claim. It did not require the production of Mr. Frattaroli’s file to discover the existence of the document or to ascertain its (purported) importance as evidence in this proceeding.

Background

Although Mrs. Garic and her husband, Pero Garic, both gave evidence at the hearing, most of the salient facts are not in dispute.

Mr. and Mrs. Garic moved to Canada from the former Yugoslavia in 1996. In that same year, Mr. Garic began driving a truck and received work through a broker by the name of Pasinato. Mrs. Garic was doing some work as a housekeeper. In 2000, Mrs. Garic decided that she would also like to drive a truck and she obtained her AZ class driver’s license. Upon receiving her license, Mrs. Garic began working with her husband who bought a second truck in May 2001. Thereafter, the Garics worked in partnership (without a written partnership agreement) under the name Garic Haulage.

At the time of the accident, the business owned two trucks (and trailers), one that was operated by Mr. Garic and one that was operated by Mrs. Garic. Mr. Garic was driving for Pasinato and another broker by the name of Cupido. Mrs. Garic drove for Cupido only. In the year prior to the accident, 2005, income generated from the business was allocated equally between its two partners, Mr. and Mrs. Garic.⁴

There was no evidence that the 50/50 distribution of income between Mr. and Mrs. Garic prior to the accident was the result of an income splitting arrangement to minimize tax consequences. Mrs. Garic was a fully active participant in the business. According to her uncontroverted evidence, Mrs. Garic drove one of the business’s two trucks, using an 18-speed standard transmission, up to 12 hours per day, Monday to Friday. Her job also required that she begin each shift with a pre-trip safety inspection of the truck that included checking the tires, checking fluid levels and fuel, cleaning windows and ensuring the overall cleanliness of the vehicle, inside and out. Her duties also required that she shovel her trailer and clean the connection rod between the truck and the trailer after dumping a load. At the time of the accident, Mrs. Garic was driving four loads per day on average, i.e., two round trips between Nanticoke and Hamilton.

Mrs. Garic sustained serious injuries in the accident of July 11, 2006. Although Mrs. Garic was eventually able to assume some minor administrative duties on behalf of Garic Haulage, such as making bank deposits and signing cheques, she has not returned to driving since the accident. Mrs. Garic’s level of impairment, and whether she meets the disability test for entitlement to IRBs, are not issues that are before me.

Mr. Garic continued to drive and operate Garic Haulage following the accident. In or about the second quarter of 2007, Garic Haulage hired a replacement worker who took over most of the driving duties formerly provided by Mrs. Garic. This enabled Garic Haulage to continue to operate at or near pre-accident levels. However, I note that Mr. Garic did assume responsibility for certain tasks that Mrs. Garic had been responsible for pre-accident; namely, he cleaned and fuelled the truck, and conducted pre-trip inspections.⁵ Mr. Garic estimated that these additional responsibilities took approximately two hours per shift, such that Mr. Garic’s 10-12 hour days were now 12-14 hours long.

As noted above, the Garics were operating Garic Haulage as an equal partnership without a written partnership agreement prior to the accident. There was no evidence that the terms of their partnership were altered by agreement post-accident, although they accepted the advice of their bookkeeper, Mr. Jamkodjian, to allocate post-accident income, for tax purposes, according to their respective contributions to the business, rather than the 50/50 split that had been applied in the pre-accident years.

The Garics confirmed that, before the accident, they did not track income generated by each of them separately. Business income was deposited, without differentiation, into a bank account maintained by Garic Haulage for which both Mr. and Mrs. Garic had signing authority. Both took responsibility for paying the bills of Garic Haulage. The Garics periodically drew upon the profits of the business, almost always by cheques made out to Mr. Garic, although Mrs. Garic was frequently the signatory. These draws would then be deposited to a joint account maintained in the names of both Mr. and Mrs. Garic from which both would pay personal and family expenses.

The evidence of the Garics confirmed that there was no material change in these financial arrangements post-accident.

ANALYSIS:

Allocation of post-accident income generated by Garic Haulage to Mrs. Garic

There is no disagreement between the parties regarding the calculation of Mrs. Garic’s pre‑accident net weekly income. Mr. Pyper accepts Mr. Frattaroli’s calculation of 80% of pre‑accident net weekly income at $510.90.⁶ Since Mrs. Garic did not purchase optional benefits, her IRB entitlement, subject to deductions for post-accident income, is limited to $400.00 per week.

The primary issue, as identified, is the extent to which post-accident income generated by Garic Haulage should be allocated to Mrs. Garic.

Pursuant to subsection 6(2) of the Schedule, an insurer is permitted to deduct post-accident net income from any IRB otherwise payable as follows:

(2) The insurer may deduct from the amount of the income replacement benefit payable to an insured person 80 per cent of the net income received by the insured person in respect of any employment subsequent to the accident. O. Reg. 403/96, s. 6 (2).

Subsection 6(4) further provides:

(4) For the purpose of subsection (2), net income from self-employment for an insured person who was self-employed at the time of the accident shall be determined without making any deductions for,

(a) expenses that were not reasonable or necessary to prevent a loss of revenue;

(b) salary expenses that were paid to replace the person’s active participation in the business, except to the extent that those expenses were reasonable for that purpose; and

(c) non-salary expenses that were different in nature or greater than the non-salary expenses incurred before the accident, except to the extent that those expenses were necessary to prevent or reduce any losses resulting from the accident. O. Reg. 403/96, s. 6 (4).

As stated above, Mrs. Garic maintains that her share of net income from Garic Haulage in the post-accident period should be limited to her relative contribution to the business. As Mrs. Garic began doing some banking and administrative tasks in the fall of 2006, Mr. Pyper allocated 5% of Garic Haulage’s profits to Mrs. Garic for both the post-accident period in 2006 and throughout 2007. There was no evidence that this percentage did not fairly reflect the level of work performed by Mrs. Garic relative to Mr. Garic’s contribution to the business. Mr. Pyper opined that “this method takes into account the unequal levels of work performed by Mr. and Mrs. Garic and is consistent with the method we would have adopted had Mrs. Garic been employed at arm’s length with the business solely operated by her husband.” As a result, Mr. Pyper maintained that the 5/95 split provides “a fairer estimate of Mrs. Garic’s loss than that employed by W&P [Williams & Partners].”

Markel, on the other hand, maintains that Mrs. Garic’s true financial situation has not changed significantly since the accident. With the hiring of a replacement worker to drive Mrs. Garic’s truck, Garic Haulage has been able to operate at or near pre-accident levels. Markel notes that subsection 6(4)(b) of the Schedule specifically contemplates salary expense to replace a person’s active participation in a business as a deduction from post-accident income, if the expense is reasonably incurred. This adjustment has been made in this case. Markel also notes that, while Mrs. Garic has not been able to resume her driving activities, she contributes to the business through banking and administrative tasks and she continues to be a partner in Garic Haulage with her husband. She also continues to share in the profits of the business through Mr. and Mrs. Garic’s joint bank account. As a result, Markel submits that its 50/50 split of post-accident income is not only consistent with the pre-accident allocation, but represents the reality of Mrs. Garic’s income post-accident.

For the reasons that follow, I generally prefer Markel’s approach.

The accountants for both parties relied on James and Allstate Insurance Company of Canada⁷ in support of their positions.

Similar to the case at hand, James involved a husband and wife who were equal partners in a family business. They also contributed equally to the business in terms of work performed. Like Mrs. Garic, Mrs. James was unable to return to her predominate pre-accident duties post-accident. Mrs. James sought to have her post-accident income reflect her post-accident contribution to the business which was estimated to be 20%. Unlike the case at hand, however, Mr. and Mrs. James continued to split income from the business 50/50 for tax purposes on the advice of their accountant.

In James, Arbitrator Blackman accepted the tax returns as prima facie evidence of post-accident income, but he also recognized that the analysis must go beyond mere form and the presumption is rebuttable. He noted as follows:

However, I agree that “the inquiry into the amount of an insured persons pre and post-accident income should go beyond mere form, to examine the substance of each individuals financial situation.”⁸ Senior Arbitrator Naylor (as she then was) has stated that “arbitrators have looked beyond the form of financial arrangements reached in a family business, in determining whether income is available to a family member.”⁹ Changes to the form of an insured’s financial affairs may be permitted where there is satisfactory evidence that the change would more accurately represent the insured’s true financial situation.

In James, the presumption was not rebutted. The evidence with respect to Mrs. James’s “true financial situation” led Arbitrator Blackman to conclude that “[t]o define pre-accident and post-accident income differently in this case, as is implied by the Applicant’s approach, would be to unjustifiably inflate the Applicant’s benefit.” In reaching his conclusion that income from the business should be allocated similarly in the pre- and post-accident periods, he also noted that “consistency is a fundamental accounting principle.”

Although the Applicant’s approach based on “relative contribution” was rejected in James, Arbitrator Blackman recognized that there had been a substantive change in the partnership relationship following the accident which, on proper evidence, could be taken into account. In short, this meant that the inquiry into Mrs. James’s “true financial situation” could also include evidence pertaining to the extra hours worked by Mr. James and the value of such extra hours. Ultimately, however, Mrs. James failed to present reliable and cogent evidence that would permit a change to the 50/50 split.

Markel also relied on Iankilevitch and CGU Insurance Company of Canada¹⁰ in support of its approach to the allocation of post-accident income to Mrs. Garic. Although Iankilevitch was decided in a somewhat different context (i.e., whether to pierce the corporate veil), I agree that the objective in that case and the case at hand is the same: “to ensure that the insured person receives an income replacement benefit that fairly and realistically reflects her income situation, avoiding both over- and under-compensation.”

Markel also relied on the following statement by Arbitrator Palmer in Bonitatibus and Wellington Insurance Company:¹¹

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.

This proposition, that an accounting approach that artificially inflates the amount of a benefit will be rejected, has also been referred to and applied in McLellan and Aviva Canada Inc.¹²

Mrs. Garic denies, however, that her approach is inconsistent or seeks to maximize the amount of her IRB. She submits that the 5% allocation of Garic Haulage income on her tax returns is an honest effort to reflect the reality of her post-accident situation. She further notes that attributing 95% of the business income to her husband denies them the benefit of income splitting and results in a tax disadvantage. While I find no basis to challenge Mrs. Garic’s bona fides, there is no doubt that her approach would result in a significantly higher IRB than the approach taken by Markel. Further, it was Markel’s evidence that the 5/95 split proposed by Mrs. Garic results in a net benefit to her, i.e., the increase in the IRB amount would greatly exceed the additional tax paid. This evidence went unchallenged.

Mrs. Garic also submitted that she had no choice but to file her tax return on the basis of a 5/95 split. She relied on subsection 103(1.1) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) which provides as follows:

…

Agreement to share income, etc., in unreasonable proportions.

(1.1) Where two or more members of a partnership who are not dealing with each other at arm’s length agree to share any income or loss of the partnership or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of those members and the share of any such member of that income, loss or other amount is not reasonable in the circumstances having regard to the capital invested in or work performed for the partnership by the members thereof or such other factors as may be relevant, that share shall, notwithstanding any agreement, be deemed to be the amount that is reasonable in the circumstances.

Mr. Jamkodjian testified that it was his opinion that subsection 103(1.1) required income from Garic Haulage to be allocated between its non-arm’s length partners on the basis of actual work performed. Mr. Jamkodjian opined that the Canada Revenue Agency would not accept a 50/50 split of Garic Haulage’s net income, given that Mrs. Garic’s work performed did not generate 50% of such income.

Mr. Frattaroli admitted that he had not considered the implications of subsection 103(1.1) in his calculation of Mrs. Garic’s IRB. Apparently, Mrs. Garic did not raise the argument until shortly before the hearing. However, Mr. Frattaroli testified that, although not a tax expert himself, he did consult with experts within his firm who would not interpret subsection 103(1.1) as preferring Mr. Jamkodjian’s approach on the facts of this case.

Of course, it is difficult to give much, if any, weight to Mr. Frattaroli’s hearsay expert evidence. At the same time, neither Mr. Jamkodjian nor Mr. Pyper are tax experts. I also have no evidence before me as to the capital invested in the business by Mr. and Mrs. Garic. In short, I have little reliable evidence that would assist me in determining the impact, if any, of subsection 103(1.1) on the allocation of post-accident income between Mr. and Mrs. Garic. I think it bears repeating, however, that subsection 103(1.1) prohibits an allocation of income that is “not reasonable in the circumstances having regard to capital invested in and work performed for the partnership by the members thereof or such other factors as may be relevant...” [emphasis added]

In the circumstances of this case, I note that a good portion of Garic Haulage’s post-accident income has been generated by a replacement worker hired to replace Mrs. Garic’s active participation in the business. Although it would not be accurate to regard such work as having been performed for the partnership by Mrs. Garic, it is also clearly not work performed by Mr. Garic. It is work performed to replace Mrs. Garic’s active participation in the business. It is work performed on her behalf. Therefore, it seems to me to be more “reasonable in the circumstances,” based on “factors as [are] relevant,” to allocate income derived by Mrs. Garic’s replacement worker to Mrs. Garic than to Mr. Garic.¹³

In summary, I am not persuaded that subsection 103(1.1) directs the result urged by Mrs. Garic, nor do I believe that it alters the task before me which remains a fair and realistic assessment of Mrs. Garic’s post-accident financial situation based on the evidence.

Mrs. Garic further submitted that, in order to deduct post-accident income, subsection 6(2) of the Schedule requires that Markel establish that she “received” post-accident income in respect of “employment.” I am not persuaded by Mrs. Garic’s arguments on these points.

On the issue of whether Mrs. Garic “received” post-accident income, Mrs. Garic relied on the Court of Appeal decision in Bapoo and Co-operators General Insurance Company.¹⁴ In that case, the Court had to decide whether the insurer was entitled to deduct gross or net disability income payments from Mr. Bapoo’s weekly income benefit. In arriving at its decision that the insurer could only deduct net payments, Laskin, J., writing for the majority, noted as follows:

The dictionary definition of “receive” includes “accept delivery of,” “take or accept into one’s hands or one’s possession,” “be provided with or given,” “acquire” and “get.” See The New Shorter Oxford Dictionary, Vol. 2 (Oxford: Clarendon Press, 1993). This dictionary definition provides a plausible meaning for the word “received” in the context of s.12(4)(b).

Applying this meaning, Bapoo “received” only the net disability income payments because, as commonly occurs, the disability carrier, Canada Life, withheld the income tax payable and remitted it to Revenue Canada. Because Canada Life withheld the tax payable, Bapoo took the net payments into his hands or his possession. That is all he got.

It is not clear to me how this case is helpful to Mrs. Garic. She did not receive draws directly payable to her pre-accident nor did she receive draws directly payable to her post-accident. She did, however, continue to sign cheques payable to her husband that were deposited in their joint bank account and from which she withdrew cash to pay for personal and family expenses. Income from Garic Haulage was available to and accessed by Mrs. Garic in the same manner both prior to and following the accident. The facts simply do not support the suggestion that Mrs. Garic ceased to “accept into [her] hands” or to “be provided with or given” the income from Garic Haulage following the accident.

On the issue of whether the post-accident income received by Mrs. Garic was in respect of “employment,” Mrs. Garic relied on the definition of “employment” in subsection 2(5) of the Schedule which provides as follows:

(5) For the purpose of this Regulation, a person is employed if, for salary, wages, other remuneration or profit, the person is engaged in employment, including self-employment, or is the holder of an office, and “employment” has a corresponding meaning. O. Reg. 403/96, s. 2 (5).

Mrs. Garic also relied on the decision of Director’s Delegate Evans in Jevco Insurance Company and Lacroix.¹⁵ In that case, Mr. Lacroix continued to receive benefit contributions from his employer pursuant to his collective agreement, even though he was no longer able to work. The value of these contributions had been included in the calculation of Mr. Lacroix’s pre-accident income. The issue in Lacroix was whether the value of these benefits should continue to be characterized post-accident as “income” or instead as an “income continuation plan.”¹⁶

Although Lacroix was decided under a prior accident benefits regime,¹⁷ it contains a provision identical to section 2(5) of the current Schedule.¹⁸ On the facts of that case, Director’s Delegate Evans found that “although Mr. Lacroix apparently maintained his status as an ‘employee’ for the purposes of the Collective Agreement, he was not ‘engaged in employment.’”

Again, it is not clear to me how this case is helpful to Mrs. Garic. Mr. Lacroix did not continue to work for his employer in any capacity post-accident. He continued to receive certain defined benefits post-accident strictly on account of the terms of his collective agreement. Mrs. Garic, on the other hand, not only resumed certain duties, but she remained a partner in the business with its concomitant rights and responsibilities. Although her ability to actively participate in the business had been diminished, I have no difficulty in concluding that Mrs. Garic remained engaged in the business and interested in its affairs. I find that she continued to be self-employed and, correspondingly, the income received by her was in respect of self-employment.

In conclusion, I find that Mrs. Garic continued to be an equal partner in Garic Haulage, and continued to receive income in the same manner as she had prior to the accident. Although her active participation was diminished, the replacement worker largely made up for this shortfall and allowed the business to continue to operate much as it had before the accident. I do not accept the 5% allocation in Mrs. Garic’s tax returns as representing a fair and realistic assessment of her true financial situation for the purpose of determining her IRB entitlement pursuant to the Schedule. As in James, I find that Mrs. Garic’s approach would “unjustifiably inflate” her benefit and result in over-compensation. Having regard to all of the circumstances, I am led to the conclusion that, in order to fairly reflect her true financial situation, 50% of Garic Haulage’s post-accident net income should be allocated to Mrs. Garic.

I may have been prepared to consider some reasonable adjustment to account for the increase in work performed by Mr. Garic, but, as in James, I was not presented with reliable and cogent evidence on this issue. I accept that Mr. Garic worked approximately two additional hours per day on account of the accident, but there was no evidence upon which I could accurately or fairly value these hours. Other than the tax returns, which, as I noted above, do not reflect the increased work performed by Mr. Garic, there is nothing in the partnership’s financial records that attempts to value Mr. Garic’s increased contributions. I am not prepared to speculate.

Other accounting considerations

Although I have found that 50% of Garic Haulage’s net income in the post-accident period should be attributed to Mrs. Garic, there remains certain accounting matters to be addressed that affect the calculation of any IRB that may be payable to Mrs. Garic.

In his supplementary report of April 8, 2009, Mr. Frattaroli makes the following concession:

Alternatively, allocating the net income [of the partnership] before the replacement wages equally to the partners and then deducting the wages paid to the replacement worker from Mrs. Garic’s share only, may more accurately represent the financial situation of both Mr. and Mrs. Garic.

I agree with this observation. The salary expense is directly and solely attributable to Mrs. Garic’s inability to participate fully in the business and should, in my view, be deducted from Mrs. Garic’s 50% share only.

Mrs. Garic also took issue with the fact that Mr. Frattaroli prepared one IRB calculation for the entire period from July 2006 to December 2007. Mr. Pyper calculated quantum of IRBs for 2006 and 2007 separately. Mr. Frattaroli maintained that there wasn’t any significant event or distinction between the two years that would warrant separate calculations for 2006 and 2007. Mr. Pyper maintained that breaking the calculation into two years would better reflect the fact that the replacement worker was hired in 2007, affecting both revenue and expenses in that year but not 2006. Mrs. Garic submitted that the amount of the IRB payable to her for 2007 would be higher (and likely somewhat lower for 2006) by breaking out the two years.

Mrs. Garic also relied on subsection 62(1) of the Schedule in support of her argument that IRBs should be calculated on a yearly basis. That provision provides as follows:

Income from Self-Employment

(1) For the purpose of this Regulation, a person’s income from self-employment shall be determined in the same manner as the person’s profit from the business in which the person was self-employed would be determined under the Income Tax Act (Canada) and the Income Tax Act (Ontario), but without taking into account,

(a) expenses that are eligible for capital cost allowance or an allowance on eligible capital property;

(b) capital gains or losses; or

(c) losses deductible under section 111 of the Income Tax Act (Canada). O. Reg. 403/96, s. 62 (1).

Mrs. Garic submitted that, since income for an unincorporated business is calculated for the calendar year for tax purposes, a person’s income from self-employment for the purposes of the Schedule should be calculated in respect of the same period. Mrs. Garic notes that subsection 62(1) does not differentiate between pre- and post-accident income.

Markel responded that subsection 62(1) merely refers to the manner of calculation and not the time period to be covered by the calculation. In fact, Markel notes that IRBs are a weekly benefit, but, as both Mr. Frattaroli and Mr. Pyper acknowledged, calculating IRBs on a weekly basis would be a practical impossibility in a self-employment situation. Therefore, according to Markel, the period over which quantum of IRBs should be calculated in the post-accident period to take account of post-accident income is really a question of what is reasonable in the circumstances. Markel submitted that the period from July 12, 2006 to December 31, 2007 chosen by Mr. Frattaroli was reasonable.

Neither party provided any case law on this point.

I am not persuaded that subsection 62(1) requires that IRBs be calculated in the post-accident period on the basis of year-by-year financial information. It may be that a significant change or intervening event affecting a business’s post-accident revenues or expenses would point to a calculation being done sooner and over a shorter timeframe. In that regard, I agree with Markel that reasonableness should dictate. However, while I can easily envision calculating the quantum of IRBs (to account for post-accident income) more often than yearly, I find it difficult to envision when it would be reasonable to combine years, especially when, as in this case, the result would likely reduce the total amount payable to the insured. Accordingly, I find that separate calculations for 2006 and 2007, as Mr. Pyper has done, results in a more accurate and fair picture of Mrs. Garic’s post-accident income from Garic Haulage for the period in dispute.

Finally, Mrs. Garic took issue with the manner in which Mr. Frattaroli calculated Garic Haulage’s expenses for the period July 12, 2006 to December 31, 2007.

For 2006, Mr. Frattaroli took the expenses of Garic Haulage,¹⁹ divided by 52 and multiplied by 24.71, being the number of weeks between July 12, 2006 to December 31, 2006. While Mr. Pyper took this same approach in respect of “fixed” expenses (i.e., expenses that do not fluctuate with sales, such as interest expense), “variable” expenses (i.e., expenses that would fluctuate with sales, such as travel expenses) were prorated based on the percentage of post-accident sales relative to total sales for the year. I prefer Mr. Pyper’s approach to the calculation of 2006 post-accident expenses as providing a more accurate account of actual expenses in that time period.

For 2007, Mr. Frattaroli used the best information available to him at the time of his calculation, being the total of expenses listed in the Revenue & Expenses listing prepared by the Garics’ bookkeeper, Mr. Jamkodjian.²⁰ Mr. Pyper, on the other hand, had available to him the Statement of Business Activities set out in Mrs. Garic’s 2007 tax return.²¹

Mr. Jamkodjian testified that the Revenue & Expenses listing had been prepared earlier than the Statement of Business Activities that was submitted to Canada Revenue Agency and used by Mr. Pyper in his calculations. Mr. Jamkodjian acknowledged that the Statement of Business Activities reflected expenses for 2007 approximately $18,000²² higher than the total reflected in the Revenue & Expenses listing. He explained that the difference was likely the result of his having received additional expense receipts from the Garics after the Revenue & Expenses listing had been prepared. I have no reason to disbelieve Mr. Jamkodjian in this regard. There was no evidence that the additional expenses reflected in the Statement of Business Activities were fabricated or artificially inflated. While no fault can be attributed to Mr. Frattaroli for relying on the Revenue & Expenses listing prepared earlier by Mr. Jamkodjian, the expenses for 2007 should be calculated on the basis of the most up-to-date and accurate information available which I find to be the expenses set out in the Statement of Business Activities for 2007.

In summary, the quantum of Mrs. Garic’s IRBs for the period July 12, 2006 to December 31, 2007 shall be calculated in accordance with the following findings and conclusions: 50% of post-accident net income from Garic Haulage shall be attributed to Mrs. Garic; net income from Garic Haulage shall be split between its partners before salary expense for the replacement worker which is deductible from Mrs. Garic’s share only; the quantum of IRBs shall be calculated for 2006 and 2007 separately; and, Garic Haulage’s expenses for 2006 and 2007 shall be the figures used by Mr. Pyper.

Special award

Mrs. Garic also seeks a special award.

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

(10) 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 primary issue before me in this proceeding has been the manner in which post-accident income from Garic Haulage should be attributed to Mrs. Garic for the period July 12, 2006 to December 31, 2007. Mrs. Garic’s claim for a special award is not directly related to that determination. Mrs. Garic’s claim is related to Markel’s decision to discontinue payment of IRBs in February 2008. Mrs. Garic maintained that it was inappropriate for Markel to engage the provisions of section 33 of the Schedule to discontinue payment of a benefit that, at the time, was already the subject of an arbitration proceeding before the Commission. Further, or in the alternative, Mrs. Garic maintained that Markel’s section 33 notice was deficient. Mrs. Garic also maintained that a misunderstanding had led to the delay in providing the requested documents, as Mr. Jamkodjian had believed that Mr. Frattaroli wanted records to April 2008 when the Garics would have filed their 2007 tax returns. Therefore, in the still further alternative, Mrs. Garic maintained that, once the requested documents were received, as they were in June 2008, Markel should have resumed payment of her IRB benefit and should have paid all amounts that had been withheld.

Markel maintained that I could not consider a special award, as I have been asked to determine the appropriate quantum of IRBs payable for the period July 12, 2006 to December 31, 2007 only. I have not been asked to determine the amount of IRBs payable, if any, in 2008 and, as a result, I cannot make a finding that payments were unreasonably withheld or delayed in 2008. Further, and in any event, Markel maintained that it was not improper for it to employ section 33 of the Schedule to request documents necessary to update Mrs. Garic’s IRB calculation (which, at that point, had not been updated for over a year) nor was it improper for it to use section 33 to discontinue IRB payments when the documents were not forthcoming.

I will deal first with Markel’s argument that, since I have not been asked to determine the quantum of any IRBs for 2008, I am not able to determine whether any payments were unreasonably withheld in 2008. I am not persuaded by this argument.

The provisions of section 33 that are relevant to this case provide as follows:

(1) A person applying for a benefit under this Regulation shall, within 10 business days after receiving a request from the insurer, provide the insurer with the following:

Any information reasonably required to assist the insurer in determining the person’s entitlement to a benefit.

A statutory declaration as to the circumstances that gave rise to the application for a benefit.

The number, street and municipality where the person ordinarily resides.

Proof of the person’s identity. O. Reg. 403/96, s. 33 (1); O. Reg. 546/05, s. 7.

(2) The insurer is not liable to pay a benefit in respect of any period during which the insured person failed to comply with subsection (1) or (1.1). O. Reg. 281/03, s. 12 (2).

(4) If an insured person who failed to comply with subsection (1) or (1.1) subsequently complies with that subsection, the insurer,

(a) shall resume payment of the benefit, if a benefit was being paid; and

(b) shall pay all amounts that were withheld during the period of non-compliance, if the insured person provides a reasonable explanation for the delay in complying with the subsection. O. Reg. 281/03, s. 12 (2).

As I see it, the issue of whether Markel was entitled to discontinue payments pursuant to section 33 is independent of the question of whether Mrs. Garic is ultimately found to be entitled to IRBs in 2008 or the quantum of any such payments.

Prior to February 2008, Markel had been paying Mrs. Garic IRBs of $183.84 per week. Markel discontinued those payments in February 2008 on the basis that Mrs. Garic allegedly failed to comply with its section 33 request. If, as Mrs. Garic submitted, Markel did not have the right to engage section 33 to discontinue IRBs when quantum of IRBs was already the subject of an arbitration proceeding, then it follows that Markel discontinued the benefit improperly and the benefit would still have been payable at the time it was improperly discontinued. Again, I see this as clearly distinct from any final determination regarding Mrs. Garic’s entitlement to or quantum of IRBs in 2008. Even if Mrs. Garic were found not to be entitled to any IRBs in 2008, that determination could not retrospectively make proper or excuse what was, at the time, an improper discontinuance, if in fact the discontinuance was improper.

I am not persuaded, however, that Markel was precluded from using section 33 to request information and documentation necessary to update the quantum of any IRBs still payable to Mrs. Garic or that its use of section 33 to discontinue IRBs was improper in this case.

Mrs. Garic submitted that an insurer should be precluded from using section 33 in respect of a benefit that is already the subject of an arbitration proceeding, as it would otherwise create an “unlevel playing field” in favour of the insurer. Mrs. Garic noted that either party may request a resumption of the pre-hearing to deal with production issues once an arbitration proceeding has been commenced. Mrs. Garic submitted that permitting an insurer to also employ the provisions of section 33 would provide it with an unfair advantage.

There is no provision in section 33 that expressly precludes its use once an arbitration proceeding has been commenced, and Mrs. Garic provided no case law in support of her position. The case law is clear, on the other hand, that an insurer’s obligation to continue to adjust the claims of its insured does not cease when a dispute arises between the parties.²³ In the context of section 42 of the Schedule, this obligation may lead an insurer to require an insured person to undergo a medical examination. This may be permissible, even if an arbitration has been commenced, provided that the examination is reasonably required to assist the insurer in determining whether the insured person continues to be entitled to the benefit (and is not simply an attempt to bolster its case), and the request has been made in a timely manner that will not delay the hearing.²⁴ While I accept that there is the potential for abuse, I find the reasonableness of a section 33 request should similarly be considered in light of the full circumstances of each case, and with consideration to whether the request is a genuine and timely attempt to secure information necessary to adjust the claim or an attempt by the insurer to gain an unfair advantage in the dispute.

The following chronology is helpful in understanding the basis for Markel’s resort to section 33 in this case, and is also relevant to Mrs. Garic’s claim to a special award.

Markel, through its own efforts, as well as those of its accountant and legal counsel, tried on several occasions to secure documentation and information necessary to update the initial IRB calculation that was done in September 2006. These efforts began in August 2007.²⁵ At the pre-hearing discussion on October 10, 2007, hearing dates were set for January 22-24, 2008. The parties also agreed to a meeting with their respective accountants to sort out production issues. The meeting took place on November 13, 2007.²⁶ By letter of same date, Mr. Frattaroli set out his understanding of the information and documentation that Mrs. Garic had agreed to provide at the meeting. Mr. Frattaroli sent follow-up letters dated November 28, December 17, 2007, January 8, January 24, and February 8, 2008.

Approximately three weeks after this series of letters from Mr. Frattaroli attempting to secure the agreed upon information and documentation, Ms. Penelope Taylor, senior claims examiner at Markel, wrote to Mrs. Garic, by letter dated February 27, 2008, ²⁷ as follows:

I wrote to you and your lawyer on January 29, 2008²⁸ with a request for information pursuant to Section 33(1) of the Statutory Accident Benefits Schedule. The notice stated that you were required to provide the requested information within 30 days and that in accordance with Section 33(2) the insurer would not be liable to pay benefits in respect of any period during which you failed to comply.

The requested information/documentation was required to be submitted to our office on February 27, 2008 and therefore you are now considered non-compliant with this section. As a result you are not entitled to payment of Income Replacement benefits from the period commencing February 27, 2008 until such time as you do provide the requested information/documentation.

If you do provide the requested information/documentation we will resume payment of your benefits, but we will only pay amounts withheld during the period of non-compliance if you provide a reasonable explanation for the delay in complying with this section.

If you would like to make a claim for any withheld benefits you must provide an explanation for the delay.

If you have any further questions please have your legal representative contact me.

Markel did not receive any response to the above-noted letters sent by Mr. Frattaroli or Ms. Taylor.

Mr. Blouin wrote to Mr. Wynperle on April 2, 2008, ²⁹ approximately six weeks before the re-scheduled hearing dates of May 13-15, 2008, noting that Mr. Frattaroli’s several requests for productions had gone unheeded. As a result, Mr. Frattaroli had not been able to provide an opinion and report for the upcoming hearing. Given that the hearing was little more than a month away, Mr. Blouin observed that it was unlikely that the hearing could proceed when scheduled, and requested of Mr. Wynperle when Markel could expect Mrs. Garic’s productions.

Mr. Wynperle responded to Mr. Blouin and the Commission by letter dated April 7, 2008,³⁰ acknowledging that productions were owing and stating his understanding that Mr. Jamkodjian was still working on some of the information that was agreed upon at their meeting in November. Mr. Wynperle did not offer any further explanation for the delay nor did he make any reference to the fact that IRBs had been discontinued as a result of non-compliance with the section 33 request. Mr. Wynperle agreed with Mr. Blouin that a further adjournment of the hearing should be granted to address the outstanding productions. The hearing was re-scheduled to October 7-9, 2008.

By letter dated June 6, 2008 to Mr. Blouin, Mr. Wynperle provided Markel with the accounting information and documentation that Mrs. Garic had agreed to provide at the meeting in November 2007. By letter of same date to Ms. Taylor, Mr. Wynperle requested that Mrs. Garic’s income replacement benefits be reinstated. Again, Mr. Wynperle’s letters do not offer a further explanation for the delay in providing the information and documentation nor do they raise any concerns with the fact that, since February 27, 2008, Markel had engaged the provisions of section 33 to discontinue Mrs. Garic’s IRBs.

The hearing in this matter was adjourned on two further occasions, finally proceeding to hearing on May 12 and 13, 2009.³¹ Markel submitted that it did not receive particulars of Mrs. Garic’s special award claim until a few days before the hearing. It appears that this was the first time that Markel had heard that Mrs. Garic objected to Markel’s use of section 33 to discontinue her IRB payments for non-compliance with production requests. While Mrs. Garic’s failure to object to Markel’s use of section 33 when IRBs were discontinued in February 2008 until shortly before the hearing in May 2009 does not constitute waiver of her rights, it does, in my view, speak to the seriousness with which Mrs. Garic viewed the conduct as a misuse of section 33 and an attempt by Markel to exploit the Schedule to gain an unfair advantage.

On the basis of the above chronology, I am not persuaded that Markel acted improperly when it engaged the provisions of section 33 to attempt to secure information and documentation from Mrs. Garic. Markel had been paying IRBs of $183.84 per week for over a year on the basis of financial documentation that only permitted a calculation for the very short post-accident period from July 12 to August 31, 2006. Ongoing requests for information and documentation, that Mrs. Garic had agreed to produce, went unanswered. In these circumstances, I find that it was reasonable for Markel to have engaged the provisions of section 33 in order to assess the quantum of Mrs. Garic’s ongoing entitlement to IRBs.

One can only speculate whether Markel could have obtained a similar result by bringing a motion before the pre-hearing arbitrator for an order suspending further IRB payments pending production of the requested documents. I am not familiar with any cases where such an order has been issued, and counsel did not direct me to any case law on point. Clearly, though, certain remedies available under Rule 32 of the Dispute Resolution Practice Code, fourth edition, (the “Code”) would not have been helpful until the substantive hearing, such as the exclusion of documents (if they were ever subsequently produced) or the drawing of an adverse inference by the hearing arbitrator. Even a stay of proceedings by the pre-hearing arbitrator, which has been ordered in respect of section 42 non-compliance,³² would not be an effective remedy in the context of this case, as it would simply leave Markel paying IRBs of $183.84 per week indefinitely. In any event, whatever possible remedies may have been available to Markel under the Code, I do not find, on the facts of this case, that Markel was precluded from also using the provisions of section 33 of the Schedule.

Mrs. Garic also took issue with the form of the notice that discontinued her IRBs pursuant to section 33. Ms. Taylor’s letter of February 27, 2008 discontinued IRBs on the basis that information and documentation previously requested in correspondence dated January 29, 2008 had not been provided to Markel. Mrs. Garic maintained that it was insufficient for the February 27, 2008 letter to simply refer to the January 29, 2008 request. Mrs. Garic maintained that Markel’s letter of February 27, 2008 should have contained all information necessary to constitute notice of section 33 non-compliance and its consequences without cross-referencing prior correspondence.

I do not accept that Markel’s letter of February 27, 2008 fell short of providing proper notice to Mrs. Garic. This letter clearly outlined the reason for the action being taken by Markel and what was required to have IRBs reinstated. An Explanation of Benefits (OCF-9) setting out Mrs. Garic’s right to dispute Markel’s determination accompanied the letter. As with the letter of January 29, 2008, the letter of February 27, 2008 and the OCF-9 were sent to both Mrs. Garic and Mr. Wynperle.

It was not clear how Mrs. Garic would have Markel provide further and better notice of her non-compliance with section 33 or the consequences thereof, other than perhaps by attaching the January 29, 2008 letter to the February 27, 2008 letter. While this may have been preferable, I do not find, on the facts of this case, that the failure to do so rendered the notice provided for in the letter of February 27, 2008 deficient. Again, I note that Mrs. Garic led no evidence that she (or her counsel) did not receive or understand the January 29, 2008 letter from Markel.

Finally, there is the issue of whether Markel unreasonably withheld payments when it failed to resume Mrs. Garic’s IRB payments after receiving the requested financial information and documentation that accompanied Mr. Wynperle’s letter of June 6, 2008, and whether it should have paid all amounts that were withheld during the period of non-compliance.

On the latter point, I find that Mrs. Garic has failed to provide a reasonable explanation for the delay in complying with the section 33 request. I do not accept Mr. Jamkodjian’s explanation for the delay that the requested documents were only to be provided after the Garics’ 2007 tax returns were filed in or about April 2008. The series of letters from Mr. Frattaroli between November 2007 and February 2008 are clear that he did not expect to wait until April 2008 for the requested documents, and yet neither Mr. Wynperle nor Mr. Jamkodjian corresponded with Mr. Frattaroli to communicate a different understanding. Further, the parties agreed to adjourn the hearing to May 13-15, 2008. Given the time that Mr. Frattaroli would reasonably require to review the documents and deliver a report, I do not accept the explanation that the parties did not contemplate delivery of the requested documents until sometime in April 2008. While there may be some merit to Mrs. Garic’s submission that Markel should have reminded her in June 2008 (when the requested documents were finally provided) that it would pay amounts withheld upon receipt of a reasonable explanation for the delay, the fact remains that Mrs. Garic has still not provided a reasonable explanation.

However, I do find that Markel erred in not resuming IRB payments to Mrs. Garic when it received the requested information and documents in June 2008. Subsection 33(4)(a) of the Schedule specifically provides that “If an insured person who failed to comply with subsection (1) or (1.1) subsequently complies with that subsection, the insurer shall resume payment of the benefit, if a benefit was being paid.” Ms. Taylor’s own letter of February 27, 2008 clearly states that “If you do provide the requested information/documentation we will resume payment of your benefits.”

Markel provided no explanation for not resuming IRB payments to Mrs. Garic when it finally received the information and documentation it had requested from her. As a result, I find that Markel unreasonably withheld IRB payments of $183.84 per week from June 6, 2008 until August 22, 2008 when Mr. Frattaroli provided his revised calculations reducing the quantum of IRBs to nil.

As I noted above, even if subsequent calculations determine that Mrs. Garic is not entitled to any IRBs in 2008, it would have no bearing on the fact that, at the time, IRBs were payable at $183.84 per week. As a result, IRB payments owing from June 6, 2008 to August 22, 2008 shall be paid without deduction on account of any determination that may be made that the IRB payable during that time period is less than $183.84 per week. It is also payable without any right of set off against any alleged overpayment to Mrs. Garic in respect of any other time period. I find that, if I were to hold otherwise, it would “negate or make meaningless” the insurer’s obligation to comply with the requirements of the Schedule.³³

Although I have found that Markel unreasonably withheld IRBs from June 6, 2008 to August 22, 2008, I do not find that Markel’s conduct to have been as egregious as in other cases where the insurer’s conduct has warranted a significant special award.³⁴ In any event, the absolute dollar amount of the special award that could be awarded in this case is limited by the maximum permissible special award calculated as follows: “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)).”³⁵

In this case, the amount that was unreasonably withheld is approximately $2,000.00. To arrive at the maximum special award that could be awarded in this case, interest pursuant to section 46 of the Schedule and compound interest pursuant to section 282(10) of the Insurance Act would be added to this amount. Fifty percent of this total would be the maximum special award. I do not know the precise total that would be generated by these calculations, but given the amount at issue and taking into account the insurer’s conduct, I find $750.00 to be an appropriate amount for the special award in this case.

In conclusion, I find that Markel shall pay to Mrs. Garic IRBs of $183.84 per week from June 6, 2008 to August 22, 2008, with interest thereon, and a special award in the amount of $750.00.

EXPENSES:

Each party met with mixed success in this hearing. If the parties cannot agree on entitlement to or the amount of expenses, either party may request a determination in accordance with Rule 79 of the Dispute Resolution Practice Code.

December 29, 2009

Robert Bujold Arbitrator

Date