Mr. Y. v. State Farm Mutual Automobile Insurance Company, 2013 ONFSCDRS 134

Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2013 ONFSCDRS 134

Appeal P13-00007

OFFICE OF THE DIRECTOR OF ARBITRATIONS

Mr. Y.

Appellant

and

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

Respondent

BEFORE:

Delegate Lawrence Blackman

REPRESENTATIVES:

Mr. David S. Wilson for the Appellant, Mr. Y.

Ms. Stacy Iordanis for the Respondent, State Farm Mutual Automobile Insurance Company

HEARING DATE:

September 27, 2013 (in person) and October 4, 2013 (telephone conference)

APPEAL ORDER

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

1. The Arbitrator’s January 14, 2013 decision is rescinded in respect of his disbursement order. The issue of the Appellant’s recovery of disbursement expenses is remitted to a new arbitration hearing.

2. The Arbitrator’s decision is otherwise confirmed.

3. If the parties cannot agree on the legal expenses of this appeal, an expense hearing shall be requested within sixty days of this decision, as set out below.

October 11, 2013

Lawrence Blackman

Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL AND THE PARTIES’ SUBMISSIONS

In his January 14, 2013 expense decision, Arbitrator Sampliner (the “Arbitrator”) awarded the Appellant legal expenses of $18,918.77 (that is, $22,583.24 less the $3,664.47 already paid) for the four-day July 2011 arbitration. The Appellant had sought $37,291.68 in legal expenses. The Respondent had claimed its own expenses of $20,667.25.

The dispute in this appeal is the quantum of the legal expenses awarded the Appellant. Regarding expense entitlement, the Arbitrator had held:

Mr. Y. enjoyed comparatively modest success in the end result. His claim for income replacement benefits was limited to about thirteen months, approximately $10,000, compared to ongoing benefits and the dismissal of all his other claims. I balance the dismissals and his small recovery against the lack of settlement offers in concluding that Mr. Y.’s modest success entitles him to modest recovery of his expenses.

The Arbitrator’s decision regarding entitlement to legal expenses has not been appealed. Regarding the quantum of legal expenses for counsel time, the Arbitrator held:

Arbitrators do not normally assess lawyer/paralegal time on the line-by-line basis that the parties have submitted here. I apply the ratio method usually used in this forum, and find that Mr. Y. is entitled to recover for his lawyer/paralegal assistance time at a reduced ratio of 1 hour preparation for each hour of hearing.

The Arbitrator found that there had been 28 hearing hours. Based on a 1:1 ratio, he awarded the Appellant a further 28 hours for hearing preparation. Notwithstanding his decision that the Appellant’s expense entitlement be modest, the Arbitrator allowed the Appellant the maximum $150 hourly rate available for applicants’ representatives. The final result was that counsel’s time was reduced from the $18,690 claimed to $8,400.

While noting that the Respondent did not make submissions regarding the Appellant’s submitted disbursements, the Arbitrator:

1. Denied the Appellant’s claimed mileage and parking expenses.
2. Reduced reports in the amounts of $1,950 and $2,650 to the $1,500 maximum allowed.
3. Reduced the $1,600 claimed for photocopying and $1,875 for interpretation fees to $250 apiece, supporting documentation being absent.
4. Disallowed two reports, at $1,200 each, on the basis that the author’s misleading basis for his opinion violated the expert’s duty to aid the Tribunal.
5. Disallowed a $263.72 disability certificate because it did not provide a reasoned analysis.

Disbursements were thus reduced from $17,235.79 to $11,585.17.

The Appellant submits that the Arbitrator erred in his January 14, 2013 decision, as follows:

1. Rule 79.2(b) of the Dispute Resolution Practice Code (Fourth Edition, Updated August 2011) (the “Code”) provides that expenses in dispute must be identified, with reasons. The Respondent, however, only addressed entitlement in its legal expenses submissions. Having made no submissions on quantum, it must be deemed to have accepted the propriety of the claimed expenses. The Arbitrator, once he found the Appellant entitled to his expenses, was bound to accept the quantum claimed, subject to any statutory limits such as the monetary maximum allowed for expert reports. The Arbitrator overlooked that the Appellant had reduced the $1,950 and $2,650 reports to the $1,500 maximum.
2. Alternatively, the Arbitrator made arbitrary and inappropriate deductions regarding legal expenses. If the Arbitrator intended to embark on an inquiry of his own he was obliged to raise those concerns with the parties and allow submissions as well as the filing of any necessary documentary support in response to those concerns. Rather, those concerns first came to the Appellant’s attention in the Arbitrator’s expense decision.

The Respondent argues that the Arbitrator’s decision should be upheld and the appeal dismissed:

1. Rule 79.2 of the Code applies only where expense entitlement has already been determined. Rule 79.1 applies in this case. There is no right of reply in Rule 79.1.
2. Subsection 282(11) of the Insurance Act gives the Arbitrator the power to allow all or part of a party’s legal expenses. The use of the word “may” in each section in the Schedule to the Expense Regulation means that an adjudicator has discretion to award less than the maximum provided.
3. The Appellant should have anticipated the Arbitrator’s concerns and addressed them in his written submissions. Supporting documentation for the disbursements claimed must be provided well before a party’s reply submissions. C. and Coachman Insurance Company, (FSCO A09-000167, July 24, 2012), held that waiting until one’s reply to provide supporting disbursement documentation deprives the adverse party of fully examining and responding to the validity and reasonableness of the expenses claimed.
4. That the Respondent did not specifically address the quantum of the Appellant’s legal expenses does not mean that it accepted them. Nothing in the legislation suggests that the objections of the other party or the reply of the party claiming the expense must be considered prior to the Arbitrator exercising his or her discretion.
5. The Arbitrator’s expense decision is entitled to deference. Poon and State Farm Mutual Automobile Insurance Company, (FSCO A01-000442, June 27, 2002), held:

… the awarding of expenses is a matter within the Arbitrator's discretion and accordingly, should not be interfered with lightly. See Gray and Zurich Insurance Company, (FSCO P98-00047, June 11, 1999). In Allison and Markel Insurance Company of Canada, (OIC P- 001231, August 21, 1996), Director's Delegate Naylor indicated that this deference is due in part to the fact that “the arbitrator is able to consider the evidence in totality, including observing and hearing any witnesses, and usually is in the best position to assess the merits of the case and the way it was handled by the parties.”

Director Sachs, in Epps and Co-operators General Insurance Company, (OIC P-002340, December 14, 1994), held that “it is not the Director's role to substitute her own assessment for the arbitrator’s.”

6. The Arbitrator’s deductions were neither arbitrary nor inappropriate. Rather, they were clearly explained in his decision.

II. ANALYSIS

The Arbitrator’s March 30, 2012 decision regarding the Appellant’s entitlement to benefits under the Schedule, stated:

If expenses are disputed, both counsel should review Dispute Resolution Practice Code Rules 75 through 79 first, amicably arrange the order of their written submissions and complete this process on or before June 8, 2012.

Accordingly, by letter dated May 29, 2012, counsel set out a timetable for written submissions regarding expense entitlement. It was proposed that once the Arbitrator made a decision on expense entitlement, the parties would make further submissions regarding expense quantum.

Notwithstanding his earlier decision, the Arbitrator rejected the parties’ suggestion. Citing the Commission’s mandate for expeditiousness, the Arbitrator’s June 18, 2012 letter limited each party to written expense submissions of five pages, at 1.5 spacing, on both entitlement to and the quantum of legal expenses. Responding submissions of similar length was granted. The opportunity to provide reply submissions was specifically denied.

The Respondent’s June 22, 2012 submissions addressed only expense entitlement. Its July 18, 2012 letter stated it had misunderstood the Arbitrator’s June 18, 2012 letter and enclosed its own Bill of Costs, but without any accompanying submissions. The Respondent’s July 20, 2012 responding submissions to the Appellant’s Bill of Costs addressed only expense entitlement.

Subsection 282(11) of the Insurance Act states:

The arbitrator may award, according to criteria prescribed by the regulations, to the insured person or the insurer, all or part of such expenses incurred in respect of an arbitration proceeding as may be prescribed in the regulations, to the maximum set out in the regulations.

In Tendenilla and Allstate Insurance Company of Canada, (FSCO A06-001684, February 4, 2009), Arbitrator Richards stated that, as “noted in McLellan and Aviva Canada Inc. [(FSCO A06-001263, February 12, 2007)]an applicant does not need to be entirely successful to be entitled to full expenses. Such a scheme would lessen the need for an insurer to serve a meaningful offer to settle and enhance the pressure for an insured to settle, even improvidently.”

These decisions were not cited before the Arbitrator. The Arbitrator chose a different approach. Regarding expense entitlement, the Arbitrator did not follow either party’s submissions. Rather, he exercised his discretion to limit the Appellant’s award to a “modest recovery of his expenses,” based on the Appellant’s “comparatively modest success in the end result.” That decision was within the Arbitrator’s exercise of discretion. I am not persuaded that the Arbitrator was limited to either awarding the Appellant or the Respondent 100% of their respective expense claims. In any event, neither party appeals the Arbitrator’s decision regarding expense entitlement.

I am not persuaded by the Appellant’s argument that (1) the Arbitrator awarded him his legal expenses, (2) the Respondent did not object to the quantum claimed, (3) the Arbitrator erred in not being bound by the Respondent’s “tactical” decision to remain silent regarding the quantum of those expenses and, therefore, (4) the Respondent is entitled to his full $37,291.68 in legal arbitration expenses, as claimed.

The Appellant’s argument is based on a false premise. It ignores the Arbitrator decision, for reasons he provided, that the Appellant was entitled only to a “modest recovery of his expenses.” To grant an appellate order allowing $37,291.68 in expenses would be to set aside, through the back door, the Arbitrator’s decision on expense entitlement that has not been appealed.

As noted, the Arbitrator allowed the Appellant the maximum $150 hourly counsel rate. As to counsel’s hours, the ratio of hours of preparation to hearing hours is well established. Arbitrator Makepeace, in Henri and Allstate Insurance Company of Canada, (OIC A-007954, August 8, 1997), held that a ratio of preparation time to hearing time provides a rough approximation of the reasonableness of a submitted account. That ratio has generally been in the range of 4:1 to 1:1.

The 1:1 ratio chosen by the Arbitrator did not reflect a disbelief in the hours claimed or their lack of reasonableness. Rather, the ratio was an element of the Arbitrator’s entitlement decision that the Appellant’s modest success at arbitration warranted a modest recovery of expenses. As the Respondent submits, subsection 282(11) of the Insurance Act allows an adjudicator to award all or part of a party’s legal expenses. Rather than awarding 50% or some other percent of the Appellant’s claimed and undisputed legal expenses, the Arbitrator awarded the lower hour ratio range, albeit at the highest hourly rate. That was within the Arbitrator’s discretion.

Both parties’ arbitration expense submissions specifically addressed the expense criterion of “each party’s degree of success in the outcome of the proceeding” in Rule 75.2(a) of the Code. The Arbitrator’s decision is based on the Respondent’s initial arbitration expense submissions (to which the Appellant had the opportunity to respond and did respond) that the Appellant was mostly unsuccessful and the Respondent achieved a greater degree of success. I am not persuaded that there was an unfair process in this aspect of the Arbitrator’s exercise of discretion.

Accordingly, I uphold the Arbitrator’s decision regarding counsel’s hours.

However, I am persuaded that there was not a fair process regarding disbursements.

Rule 79.2(a) of the Code provides that where an arbitrator has determined expense entitlement and the parties cannot agree on quantum, the party awarded its expenses shall provide its account setting out its claimed expenses. Rule 79.2(b) states that the party ordered to pay expenses must promptly identify the items in dispute and the reasons for the dispute. Rule 79.2(c) holds that the party awarded its legal expenses must promptly provide the other party with copies of supporting documentation such as receipts or invoices in respect of the disputed items.

Rule 79.1 of the Code pertains to expense disputes where an arbitrator has not made an entitlement order, and both entitlement and quantum are in dispute. Rule 79.1 does not provide a detailed procedure as set out in Rule 79.2.

One purpose of Rule 79.2 is to narrow down what is in dispute between the parties for a more expeditious and less costly resolution, as mandated by Rule 1.1 of the Code. Fairness is also a purpose of Rule 79.2, to avoid surprise by ensuring that each party knows the other side’s case and has a fair opportunity to respond.

Rule 1.2 provides that where something is not specifically provided for in the Code, the practice may be decided by referring to similar rules in the Code. Accordingly, Commission adjudicators have followed the Rule 79.2 process not only where only quantum is in dispute, but also where both quantum and entitlement are in issue, because it provides for a fair process.

Subsection 283(1) restricts appeals from the order of an arbitrator to questions of law. Delegate Makepeace stated in Howard and State Farm Mutual Automobile Insurance Company, (FSCO P04-00017, November 19, 2004), that questions of law include questions of fair procedure.

The Respondent argues that the Appellant should have anticipated every possible, realistic dispute regarding the quantum of his twelve-page Bill of Costs, and dealt with that in the five page, 1.5 space submissions allowed.

The Respondent, itself, submitted a nineteen-page Bill of Costs. The Respondent’s expense submissions were six pages, single spaced, longer than allowed. Nonetheless, they did not contain a word or document in support of the $20,667.25 claimed. To follow the Respondent’s argument, the Arbitrator could have found the Respondent entitled to its legal expenses but then awarded nothing on the basis that no dockets, invoices or supporting submissions were provided, even if the Appellant did not dispute the Respondent’s claimed hours or disbursements.

The Arbitrator did not simply reduce disbursements by a fixed percentage solely as a consequence of his entitlement decision. Rather, in the absence of any disbursement being disputed by the Respondent, the Arbitrator’s decision cherry-picked through the Appellant’s disbursements on the basis of concerns to which the Appellant had no opportunity to respond and did not know were in question.

Fendelet v. Dohey, 2007 ONCA 475, stated that “[t]his court has repeatedly stipulated that deference is owed to factual findings made at first instance, even where the appeal is from an entirely written record,” citing in part, FL Receivables Trust 2002-A v. Cobrand Foods Ltd. 2007 ONCA 425:

The principle of appellate deference to a trial judge’s fact-finding and inference-drawing applies even when the entire trial record is in writing. That is so because the principle of deference is grounded in more than a trial judge’s ability to see and hear the witnesses. Deference recognizes that even on a written record, the trial judge “lives through” the trial while a court of appeal reviews the record only through the lens of appellate review. Deference also preserves the integrity of the trial process, maintains the confidence of litigants in the process, reduces the number and length of appeals and therefore, the cost of litigation, and appropriately presumes that trial judges are just as competent as appellate judges to resolve disputes justly.

In issue in FL Receivables Trust was whether the inadvertent error of the trial judge in forgetting to allow a party its substantive right to make closing argument entitled the aggrieved party to a new trial. The Court of Appeal held:

Not every error by a trial judge entitles an aggrieved party to a new trial. Section 134(6) of the Courts of Justice Act stipulates that this court should order a new trial only where “some substantial wrong or miscarriage of justice has occurred.” This stringent standard reflects the underlying policy that new trials ordinarily are contrary to the public interest. New trials cause increased costs or wasted costs as well as delay in resolving disputes, and are therefore to be avoided unless plainly required by the interests of justice. See Arland and Arland v. Taylor, 1955 CanLII 145 (ON CA), [1955] O.R. 131 (C.A.).

The Court found it important that the aggrieved party in fact did have an opportunity to fully present his side of the case after all of the evidence was in, over the course of a two and a half day non-suit motion. Secondly, the aggrieved party had not shown that if he had been given an opportunity to make closing argument, the result would have been different.

This Tribunal is not governed by the Courts of Justice Act. However, its standard of review regarding questions of fair procedure is both sensible and practical, as is the Court of Appeal’s application of that provision. The present Appellant did have an opportunity to respond to the Respondent’s submissions on entitlement. It was on the basis of his finding of limited entitlement to legal expenses that the Arbitrator took a low ratio approach in reducing the Appellant’s legal hours.

The Arbitrator did give reasons for eliminating certain disbursements. However, unlike FL Receivables Trust, it cannot be said that the Appellant had an opportunity to fully present his case in this regard. Both parties used their restricted written submissions to address only entitlement to legal expenses.

It is unreasonable to have expected the Appellant to have also, within those five-page, 1.5 spacing written submissions, to have defended each of his 52 separate disbursement accounts, anticipating every possible realistic dispute. It would also have appeared to have been a waste of space and time, as the Respondent did not dispute any of the disbursement expenses.

I am further persuaded that had the Appellant been given the opportunity to respond to the concerns, not of the Respondent, but of the Arbitrator, the Arbitrator’s decision would have been different. A more obvious example is the Appellant not having the opportunity to provide receipts or invoices for interpretation services and photocopying the Respondent did not challenge. That alone reduced the Bill of Costs by almost $3,000.

Some may argue that legal expenses are a collateral or peripheral issue, secondary to benefit entitlement, of interest primarily, if not entirely, to lawyers and, therefore, warranting the most peremptory of processes. In response, one might look at the present context. The Arbitrator awarded the Appellant 55.6 weeks of income replacement benefits, at $185 a week; an award was $10,286, plus interest. That award came after four days of oral hearing.

The Arbitrator reduced the Appellant’s legal expenses by $14,708.44 (that is, $37,291.68 less $22,583.24). That included a $5,650.62 reduction in disbursements for which the Appellant is ultimately responsible. That award came after written submissions restricted to five pages, at 1.5 spacing. That award more than wiped out the principal of the Appellant’s benefit award. That award was forthcoming in a system created to determine first-party entitlement to statutory accident benefits where adjudicators have repeatedly stressed the guiding principles of utmost good faith and consumer protection.

I am persuaded, in the circumstances of this case, that there was a substantial wrong or miscarriage of justice regarding the process of determining disbursement expenses. I am persuaded that this aspect of the Arbitrator’s discretion regarding procedure is an error of law. Accordingly, the Arbitrator’s disbursement decision is set aside.

An appellate officer cannot simply substitute his or her discretion for that of the arbitrator. Accordingly, I am sending back to arbitration for determination all of the disbursements claimed, both those allowed and those denied, for a new, first level hearing of expense quantum. As it was the process that constituted the error of law, it is the process that must be corrected. As the expense entitlement has been determined and has not been appealed, Rule 79.2 of the Code would appear to apply.

The Appellant argued that if the matter is sent back to arbitration, the Respondent should not be allowed to make submissions. I do not agree.

There may be truth in the Appellant’s argument that the Respondent will now have an opportunity to change its position at arbitration, its submissions being provided within the strict constraints laid down by the Arbitrator, and now dispute disbursements it previously left unchallenged. On the other hand, there may be truth in that the Arbitrator’s intent of limited entitlement extended not only to counsel’s hours, but also to disbursements, which may now be eroded. However, neither party requests that if a question of quantum goes back to arbitration, the question of entitlement to legal expenses must accompany it.

The Arbitrator has retired from the Commission. There is, therefore, the disadvantage of not having disbursements decided by someone who has “lived through” the hearing. That is balanced by the expectation there will now be a fair and process that is enhanced, not impaired, by the best of intentions of providing a flexible, faster and less expensive dispute resolution process.

III. EXPENSES

If the parties cannot agree on the legal expenses of this appeal, an appeal expense hearing shall be requested, as agreed, within sixty days of this decision. The request shall be accompanied by a Bill of Costs describing the expenses claimed, the services received and the costs, as well as submissions on such entitlement or quantum expense issues as are in dispute.

If an appeal expense hearing is requested, a timeline will be set for the remaining exchange of submissions following the general outline of Rule 79.2 of the Code. If reasonably required, such as applicability of C. and Coachman regarding supporting documentation received in reply, brief oral submissions may be received by telephone conference call.

October 11, 2013

Lawrence Blackman

Director’s Delegate

Date