Financial Services Commission des

Commission services financiers

of Ontario de l’Ontario

Neutral Citation: 2015 ONFSCDRS 97

FSCO A12-001968

BETWEEN:

ARIEH ZUPNIK

Applicant

and

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

Insurer

REASONS FOR DECISION

Before: Jessica Kowalski

Heard: May 27, 2014, at the offices of the Financial Services Commission of Ontario in Toronto. Written submissions to July 11, 2014.

Appearances: Ari Singer for Mr. Zupnik Paul Omeziri for State Farm Mutual Automobile Insurance Company

Nature of the Proceeding:

The issue in this hearing is whether the applicant, Mr. Arieh Zupnik, earned post-accident income or received collateral benefits that State Farm can deduct from any income replacement benefits (“IRBs”) to which Mr. Zupnik might be entitled.

Mr. Zupnik was involved in a motor vehicle accident on March 1, 2008. State Farm paid IRBs starting March 8, 2008 at the rate of $400.00 per week. State Farm paid $1,731.42 in IRBs to March 31, 2008, because Mr. Zupnik advised that at that point, he would begin receiving long term disability (“LTD”) benefits of $8,000.00 per month from RBC Insurance Company (“RBC”).

Not long after, RBC terminated Mr. Zupnik’s LTD benefits. Mr. Zupnik commenced an action against RBC, which was settled in October 2010. In December 2010, Mr. Zupnik advised State Farm that, because of a disruption in his LTD payments, he would be seeking IRBs from State Farm from March 28, 2008 until January 5, 2009, when he claims he returned to work.

Issue:

Did Mr. Zupnik earn post-accident income from his business or receive disability payments from RBC between March 8, 2008 and January 5, 2009, and if so, is State Farm entitled to deduct such income or payments from Mr. Zupnik’s weekly IRBs during that period?

Result:

Mr. Zupnik earned income after the accident that State Farm is entitled to deduct from an IRB calculation. Mr. Zupnik’s post-accident income exceeds any IRBs to which he might be entitled.

Parties’ Positions

Mr. Zupnik’s position

Mr. Zupnik says that State Farm’s deduction of his LTD benefits was improper¹ and that monies he received from his business after the accident should not be deducted from IRBs because he could not work after the accident and therefore did not earn any income. Although he received approximately $488,000.00 from his business in 2008 (the year of the accident), Mr. Zupnik claims that since he was not able to work after the accident, the money he received should not be considered income.

Mr. Zupnik submits that State Farm is too late raising the issue of post-accident income. Specifically, he argues that State Farm cannot justify not paying IRBs in 2008 when it did not actually request related documents until five years later.

Mr. Zupnik also submits that State Farm did not comply with its statutory obligations because it did not issue a final denial of IRBs and that therefore it is seeking justification after the fact for its failure to pay IRBs after March 31, 2008.

State Farm’s position

State Farm claims that Mr. Zupnik returned to work immediately after the accident and that he continued to operate his business and earn income. State Farm submits that Mr. Zupnik’s post-accident income far exceeds any IRBs to which he could be entitled. State Farm also asks that I draw an adverse inference from Mr. Zupnik’s failure to produce financial documentation that it submits would clarify his post-accident earnings.

EVIDENCE and ANALYSIS

Mr. Zupnik is a property developer. He is, according to his evidence, the sole shareholder and director of his incorporated company, Littlebrook Investments Inc. (“Littlebrook”). Littlebrook builds high-end homes, up to four a year, but usually one at a time. Mr. Zupnik’s wife assists with some bookkeeping tasks. In addition to earning corporate profits, Mr. Zupnik earns a management fee that is split with his wife. Because Littlebrook is a closely held corporation, I have treated Mr. Zupnik and Littlebrook as one and the same for the purposes of this decision.

Mr. Zupnik does not build the homes on his own. As a general contractor, he is responsible for hiring trades, sub-trades and subcontractors to complete the work. He oversees projects from beginning to end, from the time he locates a property until it is sold, at which point he remains responsible for repairing any deficiencies arising from construction. He describes himself as a “hands on” developer, so that he does some manual labour at each construction site and supervises the work to make sure that it is done to his standards.

At the time of the accident, Littlebrook had completed construction on a home on Lauderdale Avenue in Toronto (the “Lauderdale home”).

I find that Mr. Zupnik continued to work after the accident and completed the tasks required of him at that particular stage of the Lauderdale project without interruption or disruption. I disagree with Mr. Zupnik’s claim that, as a hands-on builder, he only worked ‘when the shovel hit the ground’. I find that, as part of developing a property from beginning to end, concluding with a sale and follow-up inspections, Mr. Zupnik’s work included meeting with and paying subcontractors, site inspections, overseeing and/or completing repairs, and working with a real estate agent to sell the home. Mr. Zupnik did all of these things after the accident.

After the accident, Mr. Zupnik:

• purchased a new company vehicle, an Escalade that he used to visit the Lauderdale home and carry materials to and from the site
• continued to meet with and pay suppliers
• continued to meet with, supervise and pay sub-contractors on the Lauderdale home, including the cement contractor and the electrical contractor and arranging for installation of the home’s boiler
• met with and paid the landscaper
• listed the Lauderdale home for sale (through his real estate agent), sold the home, met with the purchasers and attended to inspect the home and to address alleged deficiencies.

Although he says he did not return to work until January 2009, when he says he felt ready to look for a new project, Mr. Zupnik in fact met with a real estate agent and negotiated the purchase in September 2008 of a new property to be developed after the Lauderdale home.

At the time of the accident, Mr. Zupnik had no new homes under construction. He had substantially completed construction of the Lauderdale home in 2007 (although he could not recall precisely when). Presumably there were no ‘shovels hitting the ground’ in January or February 2008, in the heart of winter. As a result, there would have been no new construction on March 1, 2008, at the time the accident occurred. The Lauderdale project was in its final phase (nearing completion) and Mr. Zupnik continued to do the work required at that stage without evidence of any disruption or interruption associated with the accident. His circumstances cannot even be likened to a return to work on modified duties because Mr. Zupnik was able to complete all tasks associated with the completion of the project that would have been required of him even if there had been no accident. Although not physical work, the work was integral to Mr. Zupnik’s business and would have needed to have been done at this stage of the Lauderdale project in any event.

As a result, in 2008, Mr. Zupnik (and Littlebrook) earned income of $388,344.00, based on financial statements, or $394,469.00, based on the corporate tax returns.²

In 2008, Mr. Zupnik also received half of a $200,000.00 management fee shared with his wife.

Mr. Zupnik says that none of that income should be deductible from an IRB. He submits that Littlebrook’s only revenue source in 2008 was the sale of the Lauderdale home at the end of October 2008 and that, if benefits were paid properly, there would be no income to deduct until October 30, 2008.³

Section 6(2) of the Schedule allows an insurer to deduct from the income replacement benefits 80% of the net income received by an insured person. Section 62(1) states that a person's income from self-employment should be determined in the same manner as the person's business profit under the Income Tax Act.

Mr. Zupnik retained an accountant, Ian Wollach, who prepared a report dated December 2, 2013. Mr. Wollach noted that Mr. Zupnik earned a substantial profit from a home sale after the accident. He opined, however, that income received from a “totally disabled” insured person would be payment in the nature of charity, passive business or investment income, and would not be considered employment income to be deducted from an IRB. He assumed Mr. Zupnik’s income to be zero until January 4, 2009 given Mr. Zupnik’s alleged inability to work.

I have given Mr. Wollach’s report no weight. The report did not include a review of Littlebrook’s post-accident financial statements, tax returns, payroll journals, general ledger or accounting records. It did not include a consideration or a description of Mr. Zupnik’s pre-accident job duties or what duties Mr. Zupnik continued to perform after the accident. Most fundamentally, the report is based on Mr. Zupnik’s misrepresentation that he could not, or did not, work; Mr. Wollach's conclusions in his report are therefore not supported by the facts.

I also find that the sale of the Lauderdale home was itself not affected or delayed by the accident. As noted above, Mr. Zupnik was able to complete all tasks associated with completing the project, culminating in its listing and eventual sale. It is part of the ordinary course of Mr. Zupnik’s business to be paid on the sale of a home and I find no evidence that the accident limited or impaired Mr. Zupnik from completing the project as he ordinarily would have, or in finding and making a down-payment for a new property in September 2008.

Adverse Inference

In order to calculate Mr. Zupnik’s IRBs, State Farm requested disclosure of Mr. Zupnik’s business and financial records.

When he applied for IRBs in 2008, Mr. Zupnik provided limited financial disclosure, on the basis of which State Farm’s accountant prepared a short report⁴ in which he calculated IRBs to be $400.00 per week and noted that if the IRB continued to be payable after March 31, 2008, the IRB calculation would have to be updated. State Farm’s Explanation of Benefits Form (OCF-9) noted that benefits were paid to March 31, 2008 on the basis of Mr. Zupnik’s confirmation that RBC would pay LTDs at the rate of $8,000.00 per month thereafter. State Farm also told Mr. Zupnik that if his LTD payments fell below $1,600.00 per month, he should contact State Farm.

As noted above, after RBC discontinued Mr. Zupnik’s LTD benefits in 2008, Mr. Zupnik commenced an action against RBC.

During this time, Mr. Zupnik never advised State Farm that RBC had terminated benefits or that he would be seeking further IRBs.⁵ The action against RBC settled on October 28, 2010 in exchange for payment by RBC of $70,802.00.

By letter dated December 15, 2010, Mr. Zupnik’s counsel wrote to State Farm seeking IRBs to January 5, 2009, plus interest. The letter stated as follows:

Accordingly it would appear that the total time off work commencing March 8^th, 2008, being one week after the accident, comes to 43.3 weeks. At $400.00 per week, the total comes to $17,320.00. Giving your company credit for the amount paid, being $1,371.42, it would appear that the total amount currently owing to Mr. Zupnik excluding interest is $15,948.58.

Mr. Zupnik applied for mediation at FSCO five days later.

In response to this new information, State Farm requested financial disclosure from Mr. Zupnik so that it could recalculate the IRBs. It made repeated, consistent requests for Littlebrook’s general ledger. Phillip Turner, State Farm’s accountant, testified that the general ledger was important because it would disclose all transactions for the year of the accident (2008) and what was occurring after March 1, 2008, which would allow for a comparison of business activities before and after the accident. Similarly, State Farm requested payroll journals that would disclose the amount and timing of any payments made for management wages.

Despite multiple production orders by FSCO, including two in which Arbitrator Sapin specifically ordered Mr. Zupnik to produce the general ledger, Mr. Zupnik, to the date of the hearing, did not comply with her orders.

Mr. Zupnik did not deny the existence of the general ledger. Despite repeated protestations by Mr. Zupnik and his counsel that the document had been produced, they both conceded at the hearing that not only had the ledger not been produced, but that neither had it been requested from Littlebrook’s accountants in the first place.

Mr. Zupnik is a sophisticated businessman. I am satisfied that Mr. Zupnik was well aware that the general ledger would disclose all transactions for Littlebrook and that that ledger would have been used by Littlebrook’s accountants as the foundation for the company’s financial statements.

I find that the only reasonable conclusion is that Mr. Zupnik did not produce the general ledger to State Farm because it would disclose that he continued to operate his business without interruption and continued to earn income after the accident by engaging in all of his ordinary business transactions. I find that Mr. Zupnik should not be allowed to profit from his refusal to comply with a dispute resolution process that he initiated and have drawn an adverse inference from his conduct in this regard.

I also find that Mr. Zupnik cannot now argue that State Farm is somehow barred from relying on s.33 of the Schedule⁶ to deny payment of IRBs because it is no longer adjusting its file and that it had sufficient information to calculate IRBs in 2008. The Schedule does not preclude an insured person who claims IRBs from working. On the contrary, it contemplates that an insured person may still be able to work in some capacity but that, if he or she does, the income earned from that work should be deducted from his or her IRBs.

Moreover, Mr. Zupnik did not ask State Farm to adjust his IRB claim beyond March 31, 2008. It was not until years after the accident, during which time he did not keep State Farm informed regarding his LTD benefits, that he sought retroactive payment of IRBs, at which point I find that it was reasonable for State Farm to request financial disclosure. Even if the insurer mishandled the claim – and in this case, to be clear, I make no such finding on the part of State Farm – the Court of Appeal in Stranges⁷ made it clear that Mr. Zupnik still bears the onus of proving his claim.

For the foregoing reasons, I find that Mr. Zupnik continued to work after the accident and continued to earn income. As a result, he earned close to $500,000.00 in 2008, the year of the accident, consisting of $100,000.00 in management fees and the business profit of $388,000.00. Regardless of and apart from any LTDs or related settlement monies Mr. Zupnik received, I find that he continued to work and earned income from his business that is deductible from any IRBs, and that the income derived from his post-accident employment is sufficient to reduce his IRBs to zero.

EXPENSES:

The parties did not make submissions on expenses. In the event that they are unable to resolve the issue of expenses, they may bring the issue before me in accordance with Rule 79 of the Dispute Resolution Practice Code.

May 4, 2015

Jessica Kowalski Date

Arbitrator

Financial Services Commission des

Commission services financiers

of Ontario de l’Ontario

Neutral Citation: 2015 ONFSCDRS 97

FSCO A12-001968

BETWEEN:

ARIEH ZUPNIK

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:

1. Mr. Zupnik’s application for income replacement benefits is dismissed.

May 4, 2015

Jessica Kowalski Date

Arbitrator

Footnotes

1. 1Mr. Zupnik submits that State Farm did not deduct LTDs in compliance with the formula laid out in the Schedule.
2. 2Compared with earnings in 2007 of $380,774.00, based on financial statements, or $383,173.00, based on the corporate tax returns.
3. 3The Lauderdale home was sold on October 30, 2008, generating revenue of $2,970,695.00 to Littlebrook from the sale.
4. 4Report of Phillip Turner dated July 15, 2008.
5. 5On January 28, 2009, Mr. Zupnik told State Farm that he had returned to work on January 6, 2009. It was at this time as well that Mr. Zupnik told State Farm that he was having a dispute with RBC about his disability payments. His counsel advised State Farm in December 2010 that Mr. Zupnik would be seeking IRBs from March 31, 2008 to January 5, 2009, as set out at page 2 of this decision.
6. 6The Statutory Accident Benefits Schedule - Accidents on or after November 1, 1996, Ontario Regulation 403/96, as amended.
7. 7In Stranges v. Allstate, 2010 ONCA 457, the insurer provided an improper notice of termination of income replacement benefits. The Court of Appeal found that, despite procedural non-compliance by the insurer, the insured was still required to prove her claim.