Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2010 ONFSCDRS 118

Appeal P08-00035

OFFICE OF THE DIRECTOR OF ARBITRATIONS

SANMUGANATHAN ELAIATHAMBY

Appellant

and

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

Respondent

BEFORE:

David Evans

REPRESENTATIVES:

David S. Wilson for Mr. Elaiathamby

John P. Desjardins for State Farm Mutual Automobile Insurance Company

HEARING DATE:

January 6, 2010

APPEAL ORDER

Under section 283 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

This appeal is allowed and paragraph 2 of the Arbitrator’s order dated October 21, 2008 is rescinded. The entire issue of whether Mr. Elaiathamby is entitled to a special award is returned to arbitration for a further hearing.
If the parties are unable to agree on the expenses of this appeal, an expense hearing may be arranged in accordance with Rule 79 of the Dispute Resolution Practice Code.

October 1, 2010

David Evans Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

Mr. Elaiathamby appeals the Arbitrator’s denial of a special award claimed under s. 282(10) of the Insurance Act. This provision requires an arbitrator to “award a lump sum” based on outstanding accident benefit payments if the arbitrator finds that an insurer has “unreasonably withheld or delayed” those payments. ¹

II. BACKGROUND

Mr. Elaiathamby claimed that he suffered personal injuries on January 15, 2006, when his 1990 Toyota Camry was allegedly struck by a 1993 Honda Prelude and pushed across an intersection. He sought accident benefits under the SABS–1996² from his insurer, State Farm Mutual Automobile Insurance Company. State Farm withheld benefit payments on the basis that, as set out in its appeal submissions, “the accident did not occur as alleged based on the [engineering] expert report of Gordon Jenish.” State Farm’s position has two meanings: either there was no accident, or it was not the one Mr. Elaiathamby described.³

Mr. Elaiathamby filed for arbitration, seeking both accident benefits and a special award for their denial by State Farm. Because the parties agreed on the benefits and interest owing, the hearing proceeded essentially as a hearing on whether or not Mr. Elaiathamby had been in an accident as alleged.

The Arbitrator found that Mr. Elaiathamby had provided prima facie evidence the collision occurred. He first reviewed the following circumstances that State Farm found suspicious:

Mr. Elaiathamby’s Camry and the Honda Prelude were salvage vehicles that had been refurbished, purchased and insured by their owners shortly before the claimed accident;
there were no independent witnesses;
the collision reporting centre to which the cars were towed was under investigation for staging accidents;
the drivers had the same ethnic background;
Mr. Elaiathamby had three other accident claims in his eleven-year insurance history;
Mr. Elaiathamby’s taking property damage coverage on this older vehicle indicated he was planning this accident; and,
there were discrepancies in the time of the accident, travel direction and street name.

The Arbitrator found that:

Mr. Elaiathamby’s insurance history was not suspicious and did not demonstrate he had been involved in repetitive insurance claims;
Mr. Elaiathamby and his passenger, Mr. Kapileshwar Kathirgamu, had not been engaged in past or current criminal conduct;
Mr. Elaiathamby’s explanation for taking collision coverage was straightforward;
no evidence either established or allowed him to infer that Mr. Elaiathamby intended to deceive State Farm with the errors in the time of the accident, travel direction and street name, and the discrepancies about the accident did not constitute material misrepresentations; and,
the evidence of Mr. Elaiathamby and Mr. Kathirgamu was reliable.

State Farm also denied the claim on the basis that an oral statement and a lack of tow company records indicated the Camry was neither at the scene of the accident nor towed from it.

First, State Farm relied on the oral statement that Mr. Andrew Rosen, State Farm’s adjuster, obtained from the tow truck driver who towed the Prelude, stating that the Camry was not at the accident scene. However, Mr. Elaiathamby obtained a written statement from that driver indicating that both vehicles were there and were towed. The Arbitrator preferred the written statement. (State Farm tried to summons the driver who allegedly towed Mr. Elaiathamby’s Camry, but he never attended.)

Second, despite Mr. Elaiathamby’s statement to the contrary, the Canadian Automobile Association (CAA) told State Farm that it received no call from him the night of the accident. To rebut this, Mr. Elaiathamby provided some information to Mr. Rosen in 2007, but Mr. Rosen did not follow it up. Just before the hearing CAA confirmed that Mr. Elaiathamby had indeed called them, and he then provided his cell phone records confirming his calls to CAA and a towing service.⁴

The Arbitrator did accept that Mr. Elaiathamby’s time and place errors were reasonable cause for further investigation. State Farm’s engineering expert, Mr. Gordon Jenish, examined the vehicles about three weeks after the accident while they were stored at salvage yards.⁵ As the Arbitrator put it, “State Farm’s adjuster [Mr. Rosen] conceded the Company chiefly relies on its expert evidence to contradict Mr. Elaiathamby’s claim he and his passenger were in his car at the accident scene, struck from behind by the Prelude, and pushed across the intersection.”

The Arbitrator noted that “Mr. Elaiathamby’s Camry had a crumpled rear bumper/quarter panels, broken tail lights, slightly shifted rear axle and popped trunk lid together with the scrapes and a blue paint transfer on the bumper that appeared the same colour as the Prelude.” Regarding the blue paint transfer on the Camry bumper, the Arbitrator noted that Mr. Jenish did not send a sample of the blue paint scrape on the Camry bumper for laboratory analysis to determine if it was the same as that of the Prelude nor did he explain why he believed the paint sample was too small to yield definitive results. The Arbitrator continued as follows:

However, Mr. Jenish admitted the paint scrape appeared to be the same peculiar blue as the Prelude’s colour, and that the transfer area on the Camry matched where the blue paint was scraped off the Prelude. His further admission that the paint likely comes from the Prelude underscores his concession the two cars could have come together. Based on this evidence, I find that the paint transfer on the Camry bumper derives from its contact with the front-end of the Prelude.

The issue in appeal is whether the Arbitrator erred in law in denying a special award for benefits unreasonably withheld or delayed. The reasonableness of a denial of benefits can, in part, be determined by the information that was available to the adjuster at the time of the denial. The denial in this case was continuous, including after the hearing. At the arbitration hearing, Mr. Rosen testified first, followed by Mr. Jenish. Mr. Rosen testified that he placed a great deal of weight on the Jenish report to deny benefits. Mr. Jenish in turn conceded during his testimony that the Camry and Prelude likely collided. It is difficult to see how State Farm could thereafter maintain its position that the Camry and the Prelude had not collided in some manner. Thus, its position that there was no accident was no longer tenable, leaving only the issue of whether or not the accident occurred in the manner as alleged.

On that latter point, the essence of the Jenish report was that the damage to the Camry was greater than what would be expected, given the lesser damage to the Prelude and considering the alleged speeds at the time of impact. However, the Arbitrator noted, “Mr. Jenish’s report shows he used the stiffness factor for a Camry rear-end, but admitted during cross-examination that his notes show he used the figure for the front-end. He admitted the front-end of a vehicle is much stiffer than the rear-end due to the engine and the strength of its supporting structures.” Instead, he had derived the stiffness coefficient⁶ for the rear-end of the Camry from that for a Corolla, as the Camry’s was not available. The Arbitrator found that Mr. Jenish’s failure to disclose this fact in his report detracted from his confidence in the expert’s opinion evidence.

The Arbitrator concluded that both parties’ experts either did not properly examine important physical evidence⁷ or their opinions were contradicted by it. Accordingly, he did not rely on their evidence.

The Arbitrator did have questions about the collision damage between the cars, such as why the force of the impact did not compress the Prelude’s bumper shocks or why it had less front-end damage than one would normally expect. Nonetheless, he found enough facts pointing to a collision so that the prima facie finding of a collision was not rebutted.

The Arbitrator concluded by considering the issue of a special award. The Arbitrator listed a number of Mr. Elaiathamby’s concerns, such as the confusion around whether CAA had been called to tow the Camry and, in particular, State Farm’s suspicions because all those involved in the accident had a common ethnicity. The Arbitrator did find that “the adjustment of Mr. Elaiathamby’s claim has been tainted by brazen discrimination since inception.” However, in his opinion, any possible violation of the Human Rights Code had to be a significant contributing factor to the insurer’s decision making in order to lead to a special award. He found that was not the case here, since State Farm’s evidence was “quite unequivocal and unrefuted” that it relied on its expert’s opinion that the vehicle damages were inconsistent almost immediately after the initial investigation of Mr. Elaiathamby’s claim. He concluded that no special award was warranted because he found that State Farm “principally and reasonably” relied on its expert’s opinion.

III. ANALYSIS

A considerable amount of case law has developed around the provision for a special award in s. 282(10) of the Insurance Act, none of which was discussed by the Arbitrator.

The long-standing principle from Plowright and Wellington Insurance Company, (OIC A‑003985, October 29, 1993) is that “unreasonable” behaviour by an insurer in withholding or delaying payments can be seen as “behaviour which was excessive, imprudent, stubborn, inflexible, unyielding or immoderate.”

As seen above, State Farm’s defence of its behaviour turns on its reliance on the Jenish engineering report. Simply relying on a report will not necessarily be sufficient to protect an insurer from a special award. For instance, in Graper and Liberty Mutual Fire Insurance Company, (FSCO A00-000133, July 20, 2001), it was found that the insurer’s selective reading of its own experts’ reports supported a special award. Mr. Elaiathamby submits that the Arbitrator erred in law by failing to provide adequate reasons for finding that State Farm’s continued reliance on the Jenish report was not excessive, imprudent, stubborn, inflexible, unyielding or immoderate.

The Director of Arbitrations, in Liberty Mutual Insurance Company and Persofsky, (FSCO P00‑00041, January 31, 2003), set out a seven-step approach to determining a special award. The first step, determining the benefits owing to the insured person including interest, was skipped in this case because of the agreement between the parties on the outstanding benefits and interest.

Instead, the issue related to the next two steps, namely whether or not the insurer unreasonably withheld all or some of the benefit payments. As Mr. Elaiathamby wrote in his submissions to the Arbitrator, it was his understanding “that submissions at this stage shall be restricted to whether there was an unreasonable withholding of benefits,” with the calculation of the amount to follow if there was a finding of an unreasonable withholding. Accordingly, the remaining steps that deal with the amount of the special award, as outlined in Persofsky, were not in issue.

The issue is whether the Insurer acted reasonably in withholding benefits for all or some of the period from the date of the accident to the date of the decision. The Arbitrator found that State Farm principally relied on Mr. Jenish’s report to withhold benefits. Indeed, as Mr. Elaiathamby put it in his submissions to the Arbitrator, “[i]t is not inappropriate to suggest that the entire position of the insurer rests upon the opinion expressed by Gordon Jenish.” However, at one point in his decision, the Arbitrator suggested otherwise, as follows:

State Farm put forward no evidence or rationale justifying its use of common race or ethnicity as a suspicious factor. Mr. Rosen accused both Mr. Elaiathamby and his passenger of lying and attempting to commit insurance fraud, without introducing evidence of similar past or current conduct. His admission that he considered common race and ethnicity suspicious during the initial investigation couples with his evidence State Farm would not accept the legitimacy of the accident absent a videotape of the actual incident.

State Farm’s imposition of this extremely high burden of proof together with the unsubstantiated accusations and explicit racial consideration persuades me the adjustment of Mr. Elaiathamby’s claim has been tainted by brazen discrimination since inception. These practices must not be condoned, and may be subject to further investigation, condemnation or penalty by other authorities.

While human rights violations must, in my view, be given serious consideration in relationship to claims for special awards, violations of the Human Rights Code are not alone compensable within the context of the Insurance Act. It is not a generalized inquiry into an insurer’s conduct, where there must be a linkage between the insurer’s consideration of the violating factors and the unreasonable delay or denial. My opinion is that the violation must be a significant contributing factor to the insurer’s decision-making.

Here State Farm’s evidence is quite unequivocal and unrefuted, that it has relied on its expert’s opinion that the vehicle damages did not match almost immediately after the initial investigation of Mr. Elaiathamby’s claim. I accept that ethnic or racial considerations added to State Farm’s overall prejudice against Mr. Elaiathamby, but find the prejudicial flavour was not significant. I find that State Farm principally and reasonably relied on its expert’s opinion, and therefore that Mr. Elaiathamby is not entitled to a special award under subsection 282(10) of the Insurance Act. [Emphasis added. Footnotes omitted.]

At the end of the first paragraph cited, the Arbitrator stated that Mr. Rosen, the adjuster, testified that State Farm “would not accept the legitimacy of the accident absent a videotape of the actual incident.” If this were so, then State Farm could not have principally relied on the Jenish report, since it apparently imposed the “extremely high burden of proof” of requiring a videotape to accept the legitimacy of the accident. In that case, the report would be irrelevant, as the insurer would be principally relying on the absence of a tape to deny the claim.

The Arbitrator erred in making that statement, although Mr. Rosen’s actual position, set out in the portion of the arbitration transcript reproduced below, raises issues about the reasonableness of State Farm in continuing to rely on Mr. Jenish’s report even after he testified:

Q. … I take it had there been somehow either photographs or a videotape which showed that accident occurring in the manner described by him, I take it that you would accept the version given by Mr. Elaiathamby?

A. That an accident occurred, certainly.

Q. That the accident as described by him.

A. Not if the damage didn’t match.

Q. All right, so if the damage – what you’re saying, I think, is that even if you had a videotape of the incident, as alleged by Mr. Elaiathamby, in its essential particulars, that you still wouldn’t believe that the damage on those two vehicles matched, and therefore you wouldn’t believe the accident occurred in the manner described by Mr. Elaiathamby?

A. That’s right.

Q. Pardon me?

A. That’s correct.

Q. So, anything – I take it that anything short of engineering evidence or an engineering opinion that said that the damage was consistent with the described accident would likely not satisfy you that the accident occurred in the manner described?

A. Yes, in this case.

Q. I think what you’re saying is that if there was engineering evidence that there wasn’t a match, regardless of what you had seen, you wouldn’t be prepared to accept that the accident occurred in the manner in which Mr. Elaiathamby described it?

A. It depends on the extent of the damage, inconsistency. There’s a great inconsistency here between the reported damage and what the engineer’s findings are. [Emphasis added.]

Mr. Rosen did not state he would only consider an accident legitimate if it was videotaped. Instead, he stated that this accident would not be considered legitimate even if it was videotaped, in light of the engineering report.

Accordingly, the Arbitrator was correct in finding that State Farm principally relied on the engineering report. However, as already noted, that is not necessarily sufficient to show reasonableness. Indeed, the weight given to the report and the evidence about it that came out at the hearing leads me to another principle regarding special awards: the duty to reassess. In that regard, Mr. Elaiathamby relies on the arbitration decision in Melchiorre and Wawanesa Mutual Insurance Company, (FSCO A05-000491 and A05-000492, December 22, 2006), in which it was found that the insurer failed to reassess the validity of the claim as new information was received. This finding was confirmed on appeal: Wawanesa Mutual Insurance Company and Melchiorre, (FSCO P07-00014, April 25, 2008). In this case, significant new information came out at the cross-examination of Mr. Jenish: Mr. Jenish essentially conceded that the blue paint transfer indicated that there had been contact between the Camry and the Prelude and that he did not have the correct data to confirm his suspicions about the damage to the Camry. Both these pieces of information significantly undermined the two principal grounds upon which State Farm based its position – that there was either no accident or not the one Mr. Elaiathamby described.

I note that this evidence followed a long string of other pieces of information that State Farm relied on to deny benefits that fell away as the hearing approached, which is why the Insurer was so reliant on its engineering report. I will step back a moment to go over how the whole investigation started, based on Mr. Rosen’s testimony, which will eventually lead me to another principle regarding special awards: the duty to keep an open mind.

Mr. Rosen testified that he is in the Multi-Claim Investigative Unit at State Farm that investigates suspected links among various parties. On January 23, 2006, one week after the accident, he received a call from a colleague, Mr. Michael Lake, who had been reviewing reports from a particular Collision Reporting Centre (CRC). This was part of State Farm’s pilot project at the time to review every report from that CRC. Mr. Lake had started making a list of “Red Flags” (also known as “Suspicious Loss Indicators”) in this case and told Mr. Rosen he saw some inconsistent damage. Mr. Rosen and Mr. Lake then created a handwritten list of “Red Flags,” most of which were mentioned on page 2 of this decision.

Mr. Rosen testified that other “Red Flags” were identified in a more formal list that he prepared, including that he had not been able to find debris related to the accident and that the Prelude had been written off.

Regarding the debris, Mr. Rosen testified that he went some time later to the supposed scene of the accident, which was the incorrect area because Mr. Elaiathamby had been inaccurate in his description of where the accident occurred. The correct information only came out when Mr. Elaiathamby was examined under oath. The lack of debris was therefore unsurprising.

Further, some of Mr. Rosen’s information about Mr. Elaiathamby’s prior claims turned out to be inaccurate. He also relied on that oral statement from the tow truck driver, and ignored the written statement obtained by Mr. Elaiathamby from that driver indicating that there were two cars at the accident scene. In addition, he relied on the incorrect information from CAA that Mr. Elaiathamby had not called them to arrange a tow of his car. He took no steps to investigate further when Mr. Elaiathamby provided a contact number at the CAA, but regardless of whether Mr. Elaiathamby should have done more or provided his cell phone records earlier, it was clarified immediately before the hearing that Mr. Elaiathamby had indeed made those calls to arrange a tow.

The point is: by the time Mr. Jenish testified, there was little else to support State Farm’s denial of benefits other than the Jenish report.

At the very least, Mr. Elaiathamby was entitled to a fuller explanation from the Arbitrator on how State Farm could be seen to have been reasonably relying on the report after Mr. Jenish testified, considering the new information undercutting that same report that came out during the hearing. The Arbitrator failed to consider the insurer’s duty to reassess.

Furthermore, State Farm could not have reasonably relied on the report until it had been received. The Arbitrator never dealt with the period before the report was received other than to suggest that the inconsistencies regarding the time and location of the accident justified further investigation. That does not necessarily mean that the denial of benefits pending the investigation was reasonable. Another principle discussed in Melchiorre is the duty to approach the claim with an open mind, treating the insured person in a fair manner and not as a potential adversary. In this case, Mr. Lake called up Mr. Rosen, and they compiled a list of factors to provide a basis for denying Mr. Elaiathamby’s claim, which seems to be the opposite of what that duty requires.

Regardless, Mr. Elaiathamby was entitled to reasons to support a finding that his benefits were reasonably denied prior to Mr. Jenish issuing his report. The Arbitrator failed to consider State Farm’s duty to keep an open mind at the beginning of the claim.

Turning to the issue of bias, the Arbitrator found that “the adjustment of Mr. Elaiathamby’s claim has been tainted by brazen discrimination since inception.” However, without citing any law on the point, he then stated that, in his opinion, “the violation must be a significant contributing factor to the insurer’s decision-making,” and he found that the “prejudicial flavour was not significant.” Mr. Elaiathamby submits that, aside from his difficulty in understanding how brazen discrimination since inception can be insignificant, which seems to be what the Arbitrator said, there was no evidence upon which the Arbitrator could make the finding that the prejudicial flavour was not significant throughout. By way of contrast, State Farm submits that a number of statements by Mr. Rosen support the Arbitrator’s finding. Mr. Rosen testified that ethnicity was only one factor, and that what mattered was the common country of origin as epitomized here:

Q. Would you find it offensive, Mr. Rosen, if one’s Jewishness was used —

A. Well, that’s a religion, sir. It’s not a country of origin.

Mr. Rosen also testified that he had investigated accidents where the common ethnicity was Caucasian.

With respect to the lack of significance of ethnicity overall in the adjustment of the claim, State Farm in particular referred me to questions 443 to 448 in the arbitration transcript:

Q. And so, is it fair to say that whenever this occurs, that is, you have two cars or perhaps even more than two cars, but let’s take two cars, for example, where the people are all of the same ethnicity, that that continues to be something, if not a Red Flag, a component of a classic staged accident?

A. If there are another indicators surrounding that, yes.

Q. All right, so, does this apply to all ethnic groups o[r] just Sri Lankans?

A. Well, this – like I said, this is the first time I’ve ever investigated a claim suspected staged loss where the subjects were Sri Lankan. I’ve investigated others where the subjects are from many different countries.

Q. But, whatever you’re applying to Sri Lankans that this ethnicity comes into issue, if we were dealing with six people from Ghana, for instance, two in one car, four in another, that would be a Suspicious Loss Indicator?

A. It would be a component of a staged – if it was a component of a staged accident.

Q. Well, of course, you don’t know it’s a staged accident unless you investigate everything, but —

A. No, no, but I mean if there’s just a collision between two people from the same country, a collision that doesn’t have any other indicators, then it wouldn’t be a component of it.

Q. What you look to is to see if there are other indicators, right? You look to other pieces of evidence?

A. Yes, we were reviewing every single Collision Reporting Centre Report to try to find indicators of insurance fraud.

Q. All right, and so, if there are six Ghanians – I think that’s the way you pronounce that – six people from Ghana who are involved in two separate cars, that you agree is a Suspicious Loss Indicator?

A. No, I only agree it’s a Suspicious Loss Indicator if there’s a number of other Red Flags, classic Red Flags, like new policy, which is called loss on new business; prior losses is a significant one.

However, this testimony does not support the Arbitrator’s finding that the prejudicial flavour of relying on common ethnicity was insignificant. Rather, common ethnicity is significant – that is, a component of an investigation into an alleged staged accident – when there are other Suspicious Loss Indicators. Furthermore, there is again the issue of the period after Mr. Jenish testified and before the Arbitrator issued his decision. By that point, the Jenish report provided little support for State Farm’s position, yet benefits continued to be denied, presumably on the basis of the Suspicious Loss Indicators referred to by Mr. Rosen. The trouble is, if other factors supporting a denial of benefits – such as the engineering report – are fewer, the relative importance of common ethnicity as a factor is that much greater. It follows that Mr. Elaiathamby was entitled to an explanation from the Arbitrator at least as to how the common ethnicity issue was still insignificant during that post-hearing period when benefits continued to be denied, yet there were so few other factors supporting the denial.

I have noted above several areas where the Arbitrator failed to provide the reasons to which Mr. Elaiathamby was entitled. Mr. Elaiathamby submits that this was an error of law and relies on the case of R. v. M. (Y.) (2004), 2004 CanLII 39045 (ON CA), 71 O.R. (3d) 388 (C.A.), in which the court discussed conclusory reasons, that is, conclusions without explanations for them. The court noted that the adequacy of reasons must be assessed against the rationales for giving them, and that in some cases inadequate reasons do not preclude meaningful appellate review. In criminal law, such cases would be where the accused’s evidence was obviously incredible, or the prosecution’s evidence was overwhelming and unchallenged. However, in this case, the Arbitrator specifically found that “the adjustment of Mr. Elaiathamby’s claim has been tainted by brazen discrimination since inception.” This means that State Farm’s justification for withholding benefits was hardly overwhelming or unchallenged. However, the Arbitrator dismissed the claim for a special award on the basis that State Farm was entitled to rely on the Jenish report and acted reasonably in so doing throughout the period of denial of benefits. For the reasons set out above, these reasons are inadequate. They were conclusory and constitute an error of law.

The appeal is allowed. The entire issue of whether Mr. Elaiathamby is entitled to a special award and, if so, the amount, is returned to arbitration. Given the parties’ agreement regarding outstanding benefits and interest, there is no reason why the hearing could not deal with both entitlement to and quantum of any special award.

IV. EXPENSES

If the parties are unable to agree on the expenses of this appeal, an expense hearing may be arranged in accordance with Rule 79 of the Dispute Resolution Practice Code.