Neutral Citation: 2009 ONFSCDRS 81

FSCO A08-002046

BETWEEN:

NANCY DEVRIES Applicant

and

WESTERN ASSURANCE COMPANY Insurer

DECISION ON PRODUCTION

Before: Arbitrator John Wilson

Heard: April 2, 2009, and written submissions on April 16, 23 and 27, 2009

Appearances: David Donnelly for Ms. DeVries Pamela A. Brownlee for Western Assurance Company

Issues:

The Applicant, Nancy DeVries, was injured in a motor vehicle accident on January 26, 2001. She applied for and received statutory accident benefits from Western Assurance Company (“Western Assurance”), payable under the Schedule.¹ Western Assurance terminated weekly income replacement benefits.. The parties were unable to resolve their disputes through mediation, and Ms. DeVries applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

During the pre-hearing, the parties were unable to agree on the extent of the productions required to be made by the Insurer, namely whether the Insurer was obliged to produce its records relating to the reserves set in the above matter.

Ms. DeVries took the position that any materials related to the setting of reserves with relation to Western’s perceived risk in this matter would be relevant as to whether it should be subject to a special award for unreasonably withholding benefits. Western took the position that the reserve information would be neither relevant nor would it be producible since it was patently privileged information.

With the agreement of the parties I put over this issue to a hearing by way of further written submissions by both parties.

Issue:

Is Western required to produce its reserve information relating to this claim?

Result:

I order the production of the reserve information up until the date of application for mediation to Ms. DeVries, forthwith.
Notwithstanding my finding that there is no evidence as to the reserve information being protected by privilege, out of an abundance of caution I will order that the balance of the reserve information, following the application for mediation, be released to me directly for my perusal.
If upon examination I am still satisfied that the documents are not privileged, I will order them released to Ms. DeVries. If I have concerns about one or more of the reserve documents, I will so advise the parties, and reserve the right to request further submissions before making a final decision on their release.
The arbitrator ultimately hearing this matter will decide as to the admissibility of any reserve information produced.

EVIDENCE AND ANALYSIS:

This production dispute is about the conflict between confidentiality concerns and full disclosure. Although certain types of personal and commercial information may be highly sensitive and confidential, the same information in a litigation context may be required to be disclosed to other parties and, because of the open nature of our judicial and quasi-judicial tribunals, to the world at large.²

In this case, reserve information has been requested by an insured in the context of a case that, inter alia, alleges that the insurer acted unreasonably in withholding certain benefits.

The reserve information that has been requested is said to have been created by Western as part of the Insurer’s internal financial controls. Insurers, as a regulated industry, are required to demonstrate that they remain solvent, and able to pay claims.

The reserves are an important tool in assessing the potential liabilities of an individual insurer, as well as providing some indication as to the assessment of the risk on a specific claim. Hershfield T.C.J has described reserves as follows:

These formulistic actuarial calculations are not only wholly external to the Act and Regulations but are conceived and designed to measure the solvency of an insurer in terms of its ability to pay out policyholders. Reports to the Superintendent of Financial Institutions are reports of asset values (including projected earnings) available to meet liabilities (including projected liabilities - most particularly actuarial liabilities to pay death benefits and other guaranteed amounts such as amounts guaranteed in the case of segregated funds). While such formulae designed for such purpose do not have an obvious connection to a reserve for income tax purposes, they have nonetheless necessarily been incorporated into the calculation of tax reserves for insurance companies.³

In this case, Ms. DeVries has alleged that the reserve information may shed some light on Western’s conduct in assessing her claim, and is likely to assist in determining whether Western acted reasonably in withholding or refusing to pay her benefits as claimed. To her it is potentially relevant and should be produced.

Production of relevant information and documents under the control of a party to the opposing side is fundamental to the litigation process. As Master Albert has summarized:

A litigant in a civil action has responsibilities, one of them being the obligation to disclose all documents that have a semblance of relevance to the issues raised in the pleadings, subject only to a privilege. This responsibility often requires a party to disclose personal, private and sometimes embarrassing information that would otherwise remain confidential.⁴

Statutory arbitration under the Insurance Act is a simplified procedure without provision for extensive oral discoveries, or generalized affidavits of production. Consequently, documentary production takes on an even more important meaning in such a context.

Notwithstanding the absence of discoveries and affidavits of production, arbitrations generally proceed in a timely manner with reliance on significant volumes of documentary evidence combined with oral evidence from key witnesses at the hearing itself.

It is largely accepted that a broader range of documentary discovery may be allowed during the pre-hearing process than may be accepted into evidence at the actual hearing. A certain degree of “fishing” may be allowed of information that may ultimately not be allowed into evidence. For example, as a general practice, since the medical condition of applicants is almost invariably in issue, insurers are allowed production of an applicant’s medical records from one year pre-accident, subject to submissions as to why that scope of documentary disclosure should be broadened or narrowed.⁵

The key to fair and efficient hearings in the absence of oral discoveries is the basic rule that any relevant evidence that is not privileged is producible. Such documentary evidence, including extensive confidential medical records, employment records and internal insurance documents, can be primary resources to a party advancing his or her cause in an accident benefits arbitration.

While in the past parties often tried to keep the details of their case secret, and indeed it was considered in some quarters good form to conduct trial by ambush, both the courts and arbitrators have now noted a trend towards greater, earlier disclosure.

Even if a document is confidential, in the absence of a specific privilege, it should be producible by a party. The Court of Appeal in Cook v. Ip⁶ made it clear that the production obligation includes all relevant documents, whether their content is otherwise confidential or private.

No doubt medical records are private and confidential in nature. Nevertheless, when damages are sought for personal injuries, the medical condition of the plaintiff both before and after the accident is relevant. In this case, it is the very issue in question. The plaintiff himself has raised the issue and placed it before the court. In these circumstances there can no longer be any privacy or confidentiality attaching to the plaintiff 's medical records.⁷

Cory J.A. continued:

There is an inherent jurisdiction in the court to ensure that all relevant documents are before it. The court requires this jurisdiction in order to determine properly and fairly the issues between the parties. In R. v. Snider, 1954 CanLII 40 (SCC), [1954] S.C.R. 479 at p. 484, [1954] D.L.R. 483 at p. 488, 109 C.C.C. 193, Rand J. expressed the principle in this way:

The prohibition of the statute is against disclosure to others than the departmental staff charged with the assessment but since the public interest in the administration of justice transcends that of any individual in the details of his ledger account, the ban is to be taken to be directed against a voluntary disclosure only and has no application to judicial proceedings. The intervention of the minister, as would be that of the person himself, is therefore ineffectual.

I see no reason to differentiate between the confidential medical information of an applicant, which is routinely released, and confidential or proprietary information of an insurer, which seems from time to time to be given greater deference. Rather, any determination of whether a document should be produced is dependent on its potential relevance, and whether it is protected from production by one of the several privileges under the law of evidence.

In determining which documents should be produced, the threshold of relevance is very low. In Domus, Master Polika summarized the criteria and their underlying rationale.

There is no dispute that the plaintiffs are entitled to production of any documentation that has a semblance of relevance to the matters in issue on both the certification and r. 20 motions. The general test of relevance applicable to both production of documents and to questions asked at examinations for discovery is semblance of relevance to the matters in issue as delineated by the pleadings. Underlying that very low test is the premise that admissibility and weight should be left to the trial judge and should not govern the production of documents or questions asked at examinations for discovery.⁸

The simplest way that an insured can ascertain whether his claim was treated reasonably and in good faith is by production of the insurer’s internal file and other related information. Ideally, this would indicate how an insurer handled the investigation and determined whether or not to pay the claim.

Among the related information that might assist an insured in proving that a payment was unreasonably withheld by an insurer, would be the reserve information. Certainly taken in the context of other information in the internal file it might shed some light on how the insurer viewed the claim. Potentially, the presence of a large reserve (reflecting significant risk in the claims) in the context of a blanket refusal to pay benefits ought to raise questions, and even, in the absence of clear answers, allow inferences to be drawn.

When dealing with the question of the production of information respecting reserves, the courts have generally been cautious in ordering such production, although in some cases it has been required. Most decisions that decline to order such productions do so on the basis of relevance rather than litigation privilege.⁹

The jurisprudence on ordering the production of reserve information falls both ways. In Osborne v. Non-Marine ¹⁰, the court stated:

Absent exceptional circumstances, therefore, an insurer’s internal estimation of its monetary exposure regarding the risk is not pertinent to the insurer’s conduct in assessing and responding to the claim of an insured. I do not suggest that the connection between the setting of a reserve and bad faith conduct on the part of an insurer can never be made. In my view, however, it would only be in the rare and exceptional bad faith case, where there exist specific unusual facts sufficient to support such an allegation, that such a plea would be tenable.

The view expressed by the court in Osborne is not unique:

Accordingly, while there may be a possible connection between the level at which a reserve is set and the insurer’s assessment of the claim, the setting of the reserve does not relate to the process or manner in which the claim is gauged or weighed -- i.e., assessed -- in the first place. It is therefore several steps removed from the process of dealing with the insured and “[assessing] the claim in a balanced and reasonable manner”, as Lloyd’s London, Non-Marine Underwriters [at para. 29] indicates is called for in carrying out the duty of good faith.¹¹

[22] Such is not the case here. A bald plea that the insurer has “set its reserve figures at an arbitrarily low figure which has impaired appropriate management of the claim”, unsupported by even the barest allegation of fact, is “immaterial” to the bad faith claim and “can have no effect upon the result” of the action: Duryea v. Kaufman, supra. It is therefore properly struck from the statement of claim under rule 25.11(b).

[23] There is another reason for striking para. 13(j) as well. Its prejudicial [effect] outweighs any probative value proof of the alleged fact could have.¹²

In this matter, however, there is no “bad faith claim.” While there is a claim for a special award, patently such is quite different than a claim for punitive damages, which must turn on the bad faith of the opposing party and the presence of circumstances manifesting such bad faith.

A “special award” addresses simply the reasonableness of an insurer in withholding a payment to an insured. It is not an award of punitive damages. Indeed, in Champaigne,¹³ D. Gordon J. concluded that a special award arose simply from “a consideration of whether the insurer unreasonably withheld or delayed payments” and found that this was not at all the same as a claim for punitive damages arising from the insurer’s conduct.

Binnie J. has defined punitive damages in an insurance context as follows:

Punitive damages are awarded against a defendant in exceptional cases for “malicious, oppressive and high-handed” misconduct that “offends the court’s sense of decency”: Hill v. Church of Scientology of Toronto, 1995 CanLII 59 (SCC), [1995] 2 S.C.R. 1130.¹⁴

He emphasized that “The defendant’s misconduct, and not the cause of action, thus governs the availability of punitive damages.” It is in this context that the following comments of the court in Osborne must be considered:

… while there may be a possible connection between the level at which a reserve is set and the insurer’s assessment of the claim, the setting of the reserve does not relate to the process or manner in which the claim is gauged or weighed -- i.e., assessed -- in the first place. It is therefore several steps removed from the process of dealing with the insured .¹⁵

In the context of a special award, rather than the conduct of the insurer as a whole, it is the reasonableness of the payment or non-payment that is at issue. Neither intention nor animus is necessarily important. Regardless of whether an insurer was acting out of spite or malice, the payment or not of a benefit must be examined on a scale of reasonableness.

In Plowright¹⁶, Arbitrator Palmer enunciated the classic statement of an insurer’s standard of conduct in dealing with accident benefits:

The standard expected of an insurer’s examiner and her supervisors is one of sound and moderate judgment.

In this context, I note the comments of Arbitrator Ashby in Uka:¹⁷

I find that Mr. Uka has established “a reasonable possibility of the relevance” of the reserve information by offering a plausible argument for their relevance. As well, Mr. Uka’s submissions, filed with his Application for Arbitration, referred to medical findings which if accepted might have provided a basis for paying certain benefits. However, benefits were either terminated or denied. If in the face of this, the adjuster chose to increase reserve amounts at a time proximate to the receipt of those reports then such information would support an inference that the file had been unreasonably adjusted. Mr. Uka can only find this out by being provided with the reserve information. Therefore, I find that Mr. Uka has established their relevance.

In this matter as well, I have no qualms in finding that reserve information “has a semblance of relevance to the matters in issue” and should be produced, subject to any consideration of privilege. To decide otherwise would be to deprive the insured of a potential opportunity to enquire as to the context of reasonable behaviour under the circumstances. If the information turns out to not be highly probative, then it may be excluded by the hearing arbitrator, and the insurer will not be prejudiced.

I note in passing that in Mamaca,¹⁸ the court suggested that the refusal by an insurer to produce confidential internal information may not overly handicap a party alleging misconduct, since it may rely on the principles enunciated in Snell and Farrell¹⁹ to ask the decision-maker to draw an adverse inference against the non-producing party, who was in a unique position as custodian of the information surrounding the non-payment of benefits.

According to Sopinka J. where the subject-matter of the allegation lies particularly within the knowledge of one of the parties, that party must prove it, either affirmatively or negatively. Although Sopinka did not use such terms, the onus in such situations shifts from the plaintiff to the defendant.²⁰

While I accept the principles in Snell v. Farrell, I note that the jurisprudence at the Commission shows a general reluctance to apply the concept of a shifting onus in the context of special awards. Given this, and the principle that a special award is not payable simply because an insurer was wrong in its assessment, an adverse inference is simply not a substitute for the provision of relevant, documentary evidence in the hands of the insurer.

Production of the reserve information however can be a two-edged sword. It is possible that the information contained in the reserve documents may actually corroborate an insurer’s position that it acted reasonably in the context of the claims process.

PRIVILEGE

Barring state cases involving official secrets and cabinet confidentiality, privilege, whether litigation, or solicitor client, is usually the basis for refusing to produce a document. Indeed, Western asserts that the “sensitive and privilege protected status” of the reserve information should not be set aside, and, at the very least the information should “be limited to the bright line of the date of the filing of the Application for Mediation as referenced by Arbitrator Bujold in Ghaedsharagy.”²¹

Arbitrator Bujold’s “bright line” of course was in reference to litigation privilege.

The Court of Appeal in its Chrusz decision quoted the following text by R.J. Sharpe in an attempt to shed light on the nature of modern litigation privilege:

Litigation privilege, on the other hand, is geared directly to the process of litigation. Its purpose is not explained adequately by the protection afforded lawyer-client communications deemed necessary to allow clients to obtain legal advice, the interest protected by solicitor-client privilege. Its purpose is more particularly related to the needs of the adversarial trial process. Litigation privilege is based upon the need for a protected area to facilitate investigation and preparation of a case for trial by the adversarial advocate. In other words, litigation privilege aims to facilitate a process (namely, the adversarial process), while the solicitor-client privilege aims to protect a relationship (namely, the confidential relationship between a lawyer and a client). ²²

Since the facilitation of litigation is one of the purposes of litigation privilege, the claim for privilege is intrinsically related to the existence of such litigation.

According to Master MacLeod, the link to litigation is important:

Not every investigation of facts will qualify however even if litigation was contemplated when the investigation was made and even if the document was intended to be given to counsel. There must be some connection between the creation of the document and the activities of the “adversarial advocate.”²³

Not only must there be some connection to litigation, but the “dominant purpose” of the document must be litigation-related.

In keeping with this conclusion, the court ruled that the “dominant purpose” test, not the “substantial purpose” test, will govern claims for litigation privilege. The substantial purpose test “runs against the grain of contemporary trends in discovery.” To qualify for litigation privilege under the dominant purpose test, a document must be created for the purpose of actual or contemplated litigation.²⁴

As Master MacLeod noted in Kennedy v. McKenzie: “Litigation privilege ceases to apply once the litigation is concluded.”²⁵

Stinson J. in First Choice sets out the second stage of the process:

The party resisting production must establish that the dominant purpose for the preparation of documents for which litigation privilege is claimed is, in fact, for assistance in preparation for, or the conduct of that litigation.²⁶

I note again the total absence of evidence on behalf of Western concerning the nature of the reserve information and the circumstances surrounding its creation. On the face of the issues before me, I find it difficult to understand how either solicitor-client or litigation privilege would necessarily attach to reserve documents prepared by an insurer “conceived and designed to measure the solvency of an insurer in terms of its ability to pay out policyholders.”

Generally, reserves are first calculated upon receipt of a claim, and recalculated from time to time as more information is made available. Indeed, as actuarial and accounting information they would continue to be produced, even when litigation develops over the claim.

While a solicitor’s opinion on the outcome of a case that is in litigation mode might have some affect on the readjustment of reserves, it would be incumbent upon a party resisting production of those reserve figures to demonstrate a clear link to either the work product of the solicitor in the conduct of the case, or the litigation related advice given by the solicitor to the client. Even in light of such evidence, it might still be difficult to decide that litigation was the dominant purpose of the creation of the reserve information.

After determining that there is “a real prospect of litigation reasonably supported by the evidence ... the question then is whether the dominant purpose of the documents in question was to investigate the accident and the claim or to assist the defendant in the contemplated litigation.” It would not be sufficient to establish that the ongoing investigation and resulting documents were for the dual purpose of claims assessment and anticipated litigation. The dominant purpose must be to assist in the anticipated litigation.²⁷

Western has provided no evidence as to the purpose of the reserve information in question. Barring further extrinsic evidence as to the internal procedures at Western, which has not been produced, it would appear likely that the dominant purpose for the creation of reserves would be compliance with the general regulatory regime in place to govern the conduct, and financial viability of insurance companies in Ontario.

Effect of first-party status on privilege:

Since reserve information may be changed from time to time as circumstances change and new information becomes available, it is possible that while early figures may not be privileged, those created after the beginning of litigation may have a stronger claim for protected status.

As the discussion above suggests, the exact dividing point as to when litigation is contemplated can be important, since otherwise producible documents may take on a different character once litigation is underway.

In some circumstances, however, there is no bright line. In the light of fraud or criminal intent litigation privilege could be trumped.²⁸ Likewise, in a fiduciary situation, otherwise privileged information could be producible to the party who is owed a fiduciary duty.

It has often been said that in general the relationship between an insured and an insurer is one of uberrimae fideis, utmost trust.

In examining the impact of a particular relationship on confidentiality and privilege, it is useful to consider how medical records are dealt with in a comparable situation of “utmost trust.”

It is, of course, generally accepted that insurers have a special relationship with their insured, characterized as utmost trust or good faith. As Master Clark noted in Nikeas:

This is an accident benefit action. It is not a tort action. The plaintiff and defendant (insured and insurer respectively) are bound together by obligations and responsibilities until it can be said that to one or the other the prospect of litigation between them is clear. ²⁹

This decision is revisited from time to time in assessing whether to continue (or commence) the payment of benefits. An insurer has a duty to act with utmost good faith toward its insured. It must deal with its insured’s claim fairly both in the manner it investigates and assesses the claim and in its decision whether to pay the claim.

This includes an obligation to assess and decide whether to pay a claim in a balanced and reasonable manner. As well, as part of its administrative obligations to the regulator, an insurer must make an evaluation of the risks involved in a claim and set appropriate reserves to take into account payments that may be required to be made in respect of a particular claim.

Similarly, medical records are surrounded by mutual obligations and responsibilities, informed by the fiduciary nature of the doctor-patient relationship.

LaForest J, in McInerney v. MacDonald,³⁰ observed:

A relationship may properly be described as “fiduciary” for some purposes, but not for others. That being said, certain duties do arise from the special relationship of trust and confidence between doctor and patient. Among these are the duty of the doctor to act with utmost good faith and loyalty, and to hold information received from or about a patient in confidence. (Picard, supra, at pp. 3 and 8; Ellis, supra, at pp. 10-1 and 10-12, and Hopper, supra, at pp. 73-74.) When a patient releases personal information in the context of the doctor-patient relationship, he or she does so with the legitimate expectation that these duties will be respected.

The handling of documents created by a physician - the medical record or chart related to a patient - is affected by the nature of the physician-patient relationship.

The physician-patient relationship also gives rise to the physician’s duty to make proper disclosure of information to the patient; see Reibl v. Hughes, 1980 CanLII 23 (SCC), [1980] 2 S.C.R. 880, at p. 884; and Kenny v. Lockwood, supra, at p. 155. The appellant concedes that a patient has a right to be advised about the information concerning his or her health in the physician’s medical record. In my view, however, the fiducial qualities of the relationship extend the physician’s duty beyond this to include the obligation to grant access to the information the doctor uses in administering treatment.

Laforest J. also found that, while the doctor may own the record, he or she held it in a manner akin to a trust.

The fiduciary duty to provide access to medical records is ultimately grounded in the nature of the patient’s interest in his or her records. As discussed earlier, information about oneself revealed to a doctor acting in a professional capacity remains, in a fundamental sense, one’s own. The doctor’s position is one of trust and confidence. The information conveyed is held in a fashion somewhat akin to a trust. While the doctor is the owner of the actual record, the information is to be used by the physician for the benefit of the patient. The confiding of the information to the physician for medical purposes gives rise to an expectation that the patient’s interest in and control of the information will continue.

LaForest J.’s finding as to a patient’s right to disclosure of medical records, however, is based on the fiduciary relationship between a doctor and patient. While it is generally accepted that an insurance company has a special relationship with its first-party client, this does not necessarily translate into a fiduciary relationship.

As the Court of Appeal noted in Plaza Fibreglass³¹:

The fact that a contract is one of utmost good faith does not however mean that it gives rise to a general fiduciary relationship. The relationship between insured and insurer is not akin to the relationship between, say, guardian and ward, principal and agent, or trustee and beneficiary. In these latter instances, the inherent character of the relationship is such that the law has traditionally imported general fiduciary obligations. The insurer-insured relationship is contractual, the parties are parties to an arm’s-length agreement. The principle of uberrima fides does not affect the arm’s-length nature of the agreement, and, in my opinion, cannot be used to find a general fiduciary relationship.

The court in Plaza however cautioned:

These obligations, however, do not import general fiduciary duties into each and every insurance relationship. Before such fiduciary obligations can be imported there must be specific circumstances in the relationship that call for their imposition.

While the relationship between a first-party insurer and its insured may be a fiduciary one, such a qualifier cannot be presumed. Rather, it must be supported by evidence and analysis that would lead inescapably to a description of the relationship as fiduciary. Such is not the case here.

CONCLUSION

Without realistic reserves, there is no way for regulators to effectively evaluate the financial health of an insurer based on a simple analysis of assets and liabilities. The realistic setting of reserves gives context to that analysis, by permitting a comparison of possible expenditures with the assets available to meet those potential obligations.

While I have no doubt that insurer’s would regard information about reserves as at the very least “confidential” information, since it is intended for internal consumption, and to be useful ought to reflect a frank analysis of the risk attendant on any particular claim. Certainly, employees might be less open and frank in their opinions on risk if their analysis was subject to disclosure.

The same comments might also be applicable with regard to frank discussions between an insured and his or her physician, the record of which will almost certainly be made available for an arbitration.

It has been suggested that in an accident benefit context the demarcation between ordinary adjusting and contemplated litigation should be examined closely due to the first party nature of the claim. I note, however, that Ms. DeVries’ request for production is not based on a generalized obligation by an insurer to produce the records of dealings with the insured, to its insured. There is no evidence that would support a finding of a fiduciary relationship between Ms. DeVries and Western. Consequently, the decision to order production of the reserves rests on the twin pillars of relevance and privilege.

I have found that reserve information, if produced, would likely have at least a semblance of relevance to the issues in arbitration including the special award.

While there may well be some circumstances in which reserve information may be entitled to privileged treatment, I find that in this matter there is no evidence provided by Western that would lead me to accept that this reserve information is privileged and so protected from production in these arbitration proceedings.

Consequently, I will order the production of the reserve information up until the date of application for mediation to Ms. DeVries, forthwith.

Notwithstanding my finding that there is no evidence as to the reserve information being protected by privilege, out of an abundance of caution I will order that the balance of the reserve information, following the application for mediation, be released to me directly for my perusal.

If upon examination I am still satisfied that the documents are not privileged, I will order them released to Ms. DeVries. If I have concerns about one or more of the reserve documents, I will so advise the parties, and reserve the right to request further submissions before making a final decision on their release.

EXPENSES:

Given her success in this matter, barring unusual circumstances, I would exercise my discretion to award Ms. DeVries her expenses incurred in this preliminary issue hearing. Consequently, Ms. DeVries should provide the Insurer and the Commission with an expense outline, sketching out any expenses that she may claim arising out of this motion. The parties shall have 30 days from the service of the expense outline to agree on the issue of expenses, failing which I may be spoken to in this issue.

June 24, 2009

John Wilson, Arbitrator

Date

Financial Services Commission of Ontario