Financial Services Commission des
Commission services financiers
of Ontario de l’Ontario
Neutral Citation: 2014 ONFSCDRS 107
FSCO A10-003442
BETWEEN:
HAMIDE DERVISHOLLI
Applicant
and
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
Insurer
DECISION ON A PRELIMINARY ISSUE
Before: Susan Sapin
Heard: By telephone conference call on January 24, 2014
Appearances: Sabrina Singh for Ms. Dervisholli
Jonathan Barr for State Farm Mutual Automobile Insurance Company
Issues:
The Applicant, Hamide Dervisholli, claims she was injured in a motor vehicle accident on October 29, 2007. State Farm Mutual Automobile Insurance Company (“State Farm”) paid statutory accident benefits to Ms. Dervisholli, payable under the Schedule,1 pursuant to its first party insurance policy with her. State Farm terminated benefits on February 16, 2009 and seeks repayment from Ms. Dervisholli on the basis that she willfully misrepresented material facts with respect to her claim for accident benefits; particularly, that Ms. Dervisholli and Roman Cervenak, the driver of the other vehicle, staged the accident. The parties were unable to resolve their disputes through mediation, and Ms. Dervisholli applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.
State Farm is first party insurer to both Ms. Dervisholli and Mr. Cervenak. Ms. Dervisholli also commenced a tort action in the Ontario Superior Court of Justice against Mr. Cervenak. State Farm denied coverage to Mr. Cervenak and was added as a statutory third party under the Insurance Act, to permit it to defend Ms. Dervisholli’s action against Mr. Cervenak.
The law firm of Reisler Franklin represents State Farm in both Ms. Dervisholli’s arbitration proceeding and in her tort action against its insured, Mr. Cervenak.
In December 2012, Ms. Dervisholli successfully brought a motion in Superior Court before Hambly, J. to have Reisler Franklin removed as solicitors of record for State Farm as Statutory Third Party in the tort proceeding on the basis that Reisler Franklin was using information and documents obtained by State Farm in her claim against it for accident benefits, to defend her tort claim against Mr. Cervenak. State Farm appealed that decision to Divisional Court.
Ms. Dervisholli then brought a motion before this Commission to remove Reisler Franklin as State Farm’s solicitors in her arbitration proceeding in this forum. State Farm has requested a stay of the motion until the Divisional Court has rendered its decision in State Farm’s appeal of Hambly, J.’s Superior Court decision. Ms. Dervisholli opposes the stay.
The preliminary issues are:
Should Ms. Dervisholli’s conflict of interest motion be stayed until the Divisional Court has rendered its decision?
If not, is Reisler Franklin in a position of conflict of interest which would require its removal as State Farm’s solicitors in this proceeding?
Result:
Ms. Dervisholli’s conflict of interest motion should not be stayed.
Reisler Franklin is not in a position of conflict of interest and may continue to represent State Farm in the arbitration proceeding.
Background to the hearing of the two motions:
The parties argued the first preliminary issue before Arbitrator Kominar on February 25, 2013, but Arbitrator Kominar did not render a decision.
The matter was referred to me under Rule 71 of the Dispute Resolution Practice Code (Fourth Edition — Updated January 2014) and a teleconference was scheduled for January 24, 2014. Unfortunately, due to some confusion between the Senior Arbitrators and the parties, counsel for Ms. Dervisholli and State Farm had different expectations of the purpose of the teleconference. Ms. Singh, counsel for Ms. Dervisholli, understood that Reisler Franklin had requested a stay of the conflict of interest motion pending State Farm’s appeal of Hambly, J.’s decision, and that the January 24th teleconference would deal with the request for a stay.2
I heard submissions and argument from both parties during the teleconference. Mr. Barr, counsel for the Insurer, argued that Ms. Dervisholli’s conflict of interest motion should be stayed pending the decision of the Divisional Court. He advised that if the Divisional Court determines Reisler Franklin is in a conflict of interest, then the firm would likely remove itself from both the accident benefits and the tort proceedings. Ms. Singh opposed the stay, and argued that I should decide the conflict matter on the materials already filed. Mr. Barr opposed this course of action but then agreed to provide me with his further submissions on the conflict issue.
In the interests of expediting Ms. Dervisholli’s arbitration proceeding consistent with the Commission’s mandate to produce the most just, quickest and least expensive resolution of disputes, and based on the materials filed and submissions made at the teleconference, I decided the conflict of interest motion should not be stayed, and should be determined by me based on the materials submitted and additional submissions of the parties.
I have concluded that Reisler Franklin is not in a conflict of interest and may continue to represent State Farm in this proceeding.
Context:
These two preliminary motions raise a number of issues that are best understood in the general context of automobile insurance in Ontario. Under the no-fault accident benefits scheme in place in this province, insurers are required to enter into contracts with the owners of automobiles to provide certain statutory benefits in the case of accident. The law is well established that, as first party insurers under these contracts, insurers owe a duty of utmost good faith to their insureds to act promptly and fairly when investigating, adjusting, and attempting to resolve claims made by insureds. It is equally well-established, that this contractual duty goes both ways.
Insurers are also required to indemnify their own insureds against claims brought against them in court for civil damages. Where the same insurance company is first party insurer to both a plaintiff and a defendant in a tort proceeding, a not uncommon occurrence, that insurer is in a conflict of interest, because, as stated by Justice T.R. Lederer in Ernst v. Young 2012 ONSC 5020, [2012] O.J. No. 4399:
. . . An insurer owes no duty of good faith to a person asserting a claim against its insured. The claimant is a stranger to the relationship between the insurer and the insured and is not in privity of contract with them . . . Recognizing such a duty would be “completely unworkable in the context of an adversarial relationship,” would create “irreconcilable conflicts of interest” and lead to a “breakdown of the indemnity system.” (citations omitted.)
The conflict is inherent in the automobile insurance scheme itself. In the interests of consumer protection and fairness, the potential conflicts are managed differently by the various “players” in the system – insurance companies, the courts, the Financial Services Commission of Ontario, and the legal profession itself.
Insurance companies segregate their accident benefits and indemnity files, as a matter of corporate policy and industry practice, to comply with the obligation of utmost good faith enforced by the courts, and to protect the privacy of their insureds.3 This is the origin of the so-called “Chinese Wall” between the two types of files, so that information (usually medical) obtained in the accident benefits claim is not made available to the tort adjuster, unless the insured person authorizes it or the law requires it.4
Where disputes arise between insureds and insurers and the parties find themselves either before an arbitrator at the Financial Services Commission or before a judge of the Ontario Supreme Court, any unfairness resulting from a conflict of interest is managed by rules of procedure and relevant case law that are applied to determine what documents or information each party is required to produce, and what may be admitted as evidence in a proceeding.
The procedural rules, and sometimes the case law, are different in each forum. This is a factor that influenced my decision to refuse State Farm’s request for a stay of Ms. Dervisholli’s conflict of interest motion, and my decision that Reisler Franklin was not in a conflict of interest.
Finally, lawyers are first and foremost officers of the court, and their conduct is overseen by judges, whose oversight is informed by the professional codes of conduct and ethics, by which lawyers have been trusted to govern themselves.
All of these factors come to play in the two preliminary motions brought before me.
The Dispute:
The underlying dispute between the parties stems from the fact that, as required of it by the Rules of Civil Procedure that govern the tort proceeding, State Farm produced an affidavit of documents in that proceeding, listing “every document relevant to any matter in issue in an action that is or has been in the possession, control or power of a party to the action...”.5 They included documents State Farm obtained or generated while investigating and adjusting the accident benefits claim of its own insured, Ms. Dervisholli.
State Farm maintains there is nothing improper or unfair in this, and it has simply complied with the rules of the court. It is State Farm’s position that, as a party to the tort action, it cannot be required to maintain a firewall between its accident benefits and tort files. Nor is it required to obtain Ms. Dervisholli’s consent to obtain the contents of her accident benefits file for the purpose of defending the tort claim. Furthermore, it should not be required to retain separate lawyers to defend the accident benefits claim and the tort claim.
Ms. Dervisholli disagrees. She submits that State Farm has breached its first party duty of good faith to her and obtained an unfair advantage in the arbitration proceeding by not segregating its files and by retaining the same law firm in both the arbitration and tort proceedings. She submits that Reisler Franklin is tainted because it has shared files internally, and this is a conflict of interest that requires Reisler Franklin be removed as counsel for State Farm in the arbitration proceeding.
In the tort proceeding, Hambly, J. held in favour of Ms. Dervisholli on these very issues and rejected State Farm’s arguments above. He found that, notwithstanding separate lawyers from the firm represented State Farm in both the tort and accident benefits proceedings, Reisler Franklin was using information and documents obtained by State Farm in Ms. Dervisholli’s accident benefits claim under her insurance policy with State Farm, to defend her tort claim against Mr. Cervenak. The judge concluded:
Reisler Franklin in ensuring that State Farm acts in good faith towards [Ms. Dervisholli] in her claim for accident benefits under her policy of insurance with State Farm conflicts with its duty to Cervenak in defending [Ms. Dervisholli’s] claim against him. State Farm and hence its solicitors owes no duty to [Ms. Dervisholli] in the tort action brought by her against its insured. By acting for State Farm in both matters Reisler Franklin is acting in contravention of the principles cited in Macdonald Estate. It is in a clear position of conflict of interest.
State Farm appealed Hambly, J.’s decision to the Divisional Court. It submits that Ms. Dervisholli’s motion to have Reisler Franklin removed as State Farm’s solicitors in the arbitration proceeding should be stayed pending the decision of that court. It maintains that the conflict of interest issue decided by Hambly, J. and appealed to the Divisional Court, is the same issue that Ms. Dervisholli has raised before me. As a decision of the Divisional Court would be binding upon me, there would be no point in my deciding the issue now. The resulting delay in Ms. Dervisholli’s arbitration proceeding would be offset by avoiding a multiplicity of proceedings and possible inconsistent findings.
Ms. Dervisholli opposes the stay on several grounds:
Waiting for a decision of the Divisional Court would delay the arbitration at FSCO unnecessarily;
The prejudice to her arising from the delay outweighs the prejudice to State Farm;
The conflict issues are different enough to warrant separate hearings in each forum and could result in different decisions for valid reasons.
State Farm’s request for a stay does not meet any of the tests for granting a stay.6
Analysis:
The Stay:
I agree with Ms. Dervisholli that a stay of the conflict motion would create a lengthy delay in her arbitration proceeding, and that the prejudice to her outweighs that to State Farm, given that State Farm is seeking repayment of $67,621.07 in benefits it paid out between the date of the alleged accident on October 29, 2007 and the date the benefits were terminated on February 16, 2009 with interest.
I also agree that, although the conflict of interest motion before me, as it applies to the use of information by Reisler Franklin in both the tort and accident benefits proceedings, involves the same set of facts and is essentially the same issue that was before Hambly J., different rules apply for dealing with those circumstances in court and before this tribunal. As noted in CAA Insurance Company and Sandhu7 the Commission treats the question as an exercise of the arbitrator’s discretion to order production of documents and their admission into evidence, and to control his or her own process to ensure a fair hearing. By setting up two different dispute resolution systems, the legislature was aware that different rules would apply, and different decisions could result from each forum. This factor is inherent in the motor vehicle accident regime in Ontario.
Conflict of Interest:
Simply put, the question to be answered in this motion is whether or not State Farm can retain the same law firm or lawyer, in this case, Robert S. Franklin, to defend it in both arbitration proceedings for statutory accident benefits, and in a tort action, where the applicant for statutory accident benefits and the plaintiff in the tort action are one and the same person – Ms. Dervisholli.
Ms. Dervisholli submits that Reisler Franklin, in acting for State Farm in both capacities, is in a legal conflict of interest position because the law firm is using confidential information obtained by State Farm from Ms. Dervisholli as part of its first-party insurance contract with her, to defend her tort action against State Farm. Ms. Dervisholli argues that this is unacceptable because it gives State Farm an unfair advantage in the arbitration proceeding before the Commission, as well as in her tort claim in court, and it brings the administration of justice into disrepute.
Counsel for Ms. Dervisholli made exhaustive arguments on behalf of her client and relied on a number of cases to support them. I did not find the cases either on point or helpful. The fact situations are very different, and many of the comments relied on by Ms. Dervisholli are obiter.
Regarding conflict of interest as it pertains to Reisler Franklin, Ms. Dervisholli relied on a leading case on that issue, MacDonald Estate v. Martin,8 a decision of the Supreme Court of Canada. As that decision deals with the situation of lawyers acting against former clients with whom they have had a previous solicitor-client relationship, I find the principles and the reasoning do not apply to the case before me. Ms. Dervisholli has never had a solicitor-client relationship with any lawyer at Reisler Franklin. Reisler Franklin’s only client is State Farm. I find the decision of Arbitrator Wilson in Hotchkiss and Kingsway General Insurance Company9, also relied upon by Ms. Dervisholli, distinguishable for the same reason.
I find the decision of the Divisional Court in Worthington Trucking Inc. v. Klingbeil,10 relied on by State Farm, to be the most relevant to the case at hand. As a decision of the Divisional Court, it is binding on me.
In that case, 11-year old Kerry-Jo Klingbeil was hit and seriously injured by a vehicle owned by the defendant Worthington and driven by one Phillip Thompson. Having no insurance of her own, she applied for statutory accident benefits from the defendant’s insurer, Lincoln General Insurance Company. Lincoln retained the same law firm to act for it in an arbitration proceeding and in defending the tort claim. Sedgwick J., for the Divisional Court, held that, “Where the Applicants rely on the statutory accident benefits scheme set out in the Insurance Act to claim no-fault benefits from the defendant’s insurer, the insurer ought not, as a matter of course in a subsequent tort action by the Applicants, be required to retain separate solicitors for the no-fault claim and the defence of the tort action.”11 The Divisional Court expressly held that the analysis of a disqualifying conflict of interest in MacDonald Estates did not apply, as there had never been a solicitor-client relationship between Ms. Klingbeil and the law firm retained by Lincoln.
I find the Divisional Court’s reasoning worth quoting at length, as I find it applies squarely to the issues raised in the motion before me:
The confidentiality of documents or other information received by a solicitor from a non-client in connection with pending legal proceedings or claims, depends on whether they are privileged or otherwise protected from disclosure by statute or common law. If relevant to the issues in this tort action, medical reports, records and information relating to the plaintiff are not confidential and are not protected from disclosure, whether or not obtained as the result of a statutory no-fault claim. If relevant and not privileged or otherwise protected from disclosure, non-medical information stands on the same footing as medical information.
There is no rule or obligation of confidentiality that prevents a person who receives information in confidence, from using that information to defend himself against a claim made against him by the same person who gave the confidential information to him. Privilege is waived by the person who gave the confidential information by the very act of suing the recipient of the information on a cause of action to which the confidential information is relevant. While in this case confidential medical information was given by Klingbeil to Lincoln and not the defendants Thompson and Worthington themselves, Lincoln is responsible for the defence of the action. In these circumstances, Lincoln must be treated as if it had been sued in tort by Klingbeil, for Lincoln must stand in the shoes of the defendants . . .
I reject Ms. Dervisholli’s argument that Worthington should be distinguished on its facts because Ms. Klingbeil was uninsured and applied to the defendant’s insurer, Lincoln, for statutory accident benefits, whereas Ms. Dervisholli applied for benefits under her own policy of insurance. I accept State Farm’s argument, that an uninsured person is in the same legal position as a person with their own motor vehicle insurance policy by operation of ss. 224, 268 and 270 of the Insurance Act, and the insurer owes the same duty of utmost good faith to both when adjusting a claim for no-fault benefits.
In Stratton v. Senger,12a case with the same fact pattern as Worthington, the Divisional Court found there was no “appearance of impropriety” or “possibility of unfairness” in permitting the insurer to retain the services of the same law firm for matters pertaining to the accident benefits claim and for the defence of the tort action. This is because the Court found that, as the plaintiffs had chosen to rely on the statutory scheme set out in the Insurance Act to claim accident benefits from the defendant’s insurer, “the insurer was not, as a result, obliged to segregate or isolate the information provided by the plaintiff in pursuit of his claim when it came to conduct the defendant’s defence.”13
Both these cases have been followed in FSCO arbitrations. In Ramrattan and Motor Vehicle Accident Claims Fund14, Director’s Delegate Blackman referred leave to appeal the arbitration decision of Arbitrator Miller, who had decided that the same counsel could represent the Motor Vehicle Accident Claims Fund, which provides statutory accident benefits to uninsured accident victims, in respect of accident benefits proceedings before the Commission and in the tort action, both of which were instigated by Mr. Ramrattan. Delegate Blackman found the law firm was not in a conflict of interest. He noted particularly that even if Mr. Ramrattan was successful in having the Fund’s law firm removed from the arbitration proceeding, the Fund would still be in possession of the same allegedly improper documentation, and the question would remain for the hearing arbitrator to determine whether such information should properly be received as evidence.
And that is the case here. I find no reasons for why Reisler Franklin should not continue to act as State Farm’s legal representative in the arbitration proceeding. On July 25, 2012 Reisler Franklin provided Ms. Dervisholli’s counsel with State Farm’s sworn Affidavit of Documents as required by the Rules of Civil Procedure. As State Farm points out, without this Affidavit, which listed all relevant documents in the possession, power or control of State Farm, and which necessarily included relevant information about Ms. Dervisholli and Mr. Cervenak, no party would have been aware of them. It is now up to the pre-hearing and hearing arbitrators, respectively, to deal with any issues arising about what documents should be produced, and which ones should be admitted into evidence, in the interests of procedural fairness and addressing any question of unfair advantage.
EXPENSES:
I exercise my discretion to defer the matter of expenses incurred in this preliminary issue hearing, pending the outcome of any appeals, if any, of my decision.
June 27, 2014
Susan Sapin Arbitrator
Date
Financial Services Commission des
Commission services financiers
of Ontario de l’Ontario
Neutral Citation: 2014 ONFSCDRS 107
FSCO A10-003442
BETWEEN:
HAMIDE DERVISHOLLI
Applicant
and
STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY
Insurer
ARBITRATION ORDER
Under section 282 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:
State Farm’s request for a stay of the arbitration proceeding is denied.
The law firm of Reisler Franklin may continue to represent State Farm in the arbitration proceeding.
June 27, 2014
Susan Sapin Arbitrator
Date
Footnotes
- The Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, Ontario Regulation 403/96, as amended.
- Applicant’s Factum re: Stay of Preliminary Issue hearing, January 20, 2014.
- This latter obligation is now required by legislation.
- As per a July 22, 1997 general bulletin referred to by Justice Ferrier in Kingbeil v. Worthington, 1999 CanLII 19927 (ON CTGD), [1999] O.J. No. 867 (Div. Court). The term “Chinese Wall” is no longer considered culturally appropriate. ‘Firewall’ is the accepted terminology.
- R.R.O. 1990, Regulation 194, Rule 30
- RJR-MacDonald Inc. v. Canada (Attorney General), 1994 CanLII 117 (SCC), [1994] 1 S.C.R. 311, King and Royal Insurance Company of Canada (FSCO A98-000234, March 24, 1999)
- (FSCO P01-00044, January 18, 2002), Appeal
- 1990 CanLII 32 (SCC), [1990] 3 S.C.R. 1235, 77 D.LR. (4th) 249, did not apply.
- (FSCO A10-003016, October 28, 2011)
- (Litigation guardian of) 1999 CanLII 19927 (ON CTGD), 1999, 43 O.R. (3d) 697 (Ont. Div. Crt)
- At paragraph 12.
- [1996] O.J. No. 4774 (Ont. Div. Crt)
- At para. 2
- (FSCO P12-00003, April 27, 2012), Appeal