Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2016 ONFSCDRS 244

Appeal P15-00037

OFFICE OF THE DIRECTOR OF ARBITRATIONS

ARIEH ZUPNIK

Appellant

and

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

Respondent

BEFORE:

David Evans

REPRESENTATIVES:

Ari Singer for Mr. Arieh Zupnik

Paul Omeziri for State Farm Mutual Automobile Insurance Company

HEARING DATE:

March 10, 2016

APPEAL ORDER

Under section 283 of the Insurance Act, R.S.O. 1990 c. I.8 as it read immediately before being amended by Schedule 3 to the Fighting Fraud and Reducing Automobile Insurance Rates Act, 2014, and Regulation 664, R.R.O. 1990, as amended, it is ordered that:

1. The Arbitrator’s order of May 4, 2015, is confirmed and this appeal is dismissed.

2. Mr. Arieh Zupnik shall pay to State Farm Mutual Automobile Insurance Company its legal appeal expenses in the amount of $2,100, inclusive of disbursements and HST.

September 16, 2016

David Evans Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

In her decision dated May 4, 2015, Arbitrator Kowalski dismissed Mr. Zupnik’s claim for income replacement benefits because she found he continued to work after the accident of March 1, 2008, earning post-accident income that reduced his payable IRBs to zero.

Mr. Zupnik appeals, mostly on the basis that his insurer, State Farm Mutual Automobile Insurance Company, wrongfully terminated IRBs in the first place.

However, I agree with the Arbitrator that Mr. Zupnik was still required to prove his case, so she was entitled to consider his post-accident activities and income.

II. BACKGROUND

Mr. Zupnik, a self-employed property developer and sole shareholder and director of his incorporated company Littlebrook Investments Inc., was in an accident on March 1, 2008. He claimed income replacement benefits (IRBs) from State Farm under the SABS–1996.¹ He also advised State Farm that RBC Insurance Company would be paying him collateral benefits in the form of long-term disability payments (LTDs) of $8,000 per month from March 31, 2008.

After obtaining an accountant’s report in the summer of 2008, State Farm paid Mr. Zupnik the maximum payable IRB of $400 a week up to March 31, 2008. It paid no more IRBs on the (incorrect) assumption that the LTDs reduced the payable IRBs to zero. State Farm paid some benefits like housekeeping, then closed the file in January 2009 after Mr. Zupnik said he returned to work on January 5, 2009.

Meanwhile, RBC, Mr. Zupnik’s LTD insurer, terminated Mr. Zupnik’s LTD benefits. Mr. Zupnik sued RBC and settled in October 2010 for $70,802. In December 2010 he told State Farm about the LTDs and sought IRBs of about $16,000 for the period from March 28, 2008 until January 5, 2009.

Mr. Zupnik then applied for mediation and arbitration. As noted by the Arbitrator, the pre-hearing arbitrator made numerous production orders regarding the financial records of Littlebrook, most of which went unheeded. State Farm also raised as a preliminary issue whether or not Mr. Zupnik earned deductible post-accident income from his business between March 28, 2008 and January 5, 2009. As discussed below, post-accident income – unlike a collateral benefit – is deductible from the maximum payable IRB: s. 6(2). This issue came on as a separate preliminary issue before the Arbitrator.

Regarding Mr. Zupnik’s employment, the Arbitrator noted that Littlebrook, Mr. Zupnik’s company, “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… 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.”

The Arbitrator noted that in 2007, Littlebrook had substantially completed construction of a home on Lauderdale Avenue in Toronto. After the accident on March 1, 2008, Mr. Zupnik continued to meet with and pay suppliers, sub-contractors, and the landscaper regarding that project. He met with a real estate agent in September 2008 to purchase a development property. He then listed the Lauderdale home, which sold on October 30, 2008 for $3 million.

The Arbitrator found that Mr. Zupnik not only earned post-accident income but continued to work after the accident, that he completed the tasks required of him at that particular stage of the Lauderdale project without interruption or disruption, and that as a result, in 2008, Mr. Zupnik (and Littlebrook) earned income of around $390,000. He also received half of a $200,000 management fee shared with his wife.

The Arbitrator gave no weight to the accountant’s report of Ian Wollach dated December 2, 2013, which found the profit from the home sale was not income for a “totally disabled person,” because the conclusion was “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.”

The Arbitrator then drew an adverse inference from Mr. Zupnik’s repeated failure to disclose his business and financial records. The Arbitrator found that State Farm was entitled to request financial disclosure even if the insurer had mishandled the claim. She noted that the Court of Appeal in Stranges v. Allstate Insurance Company of Canada, 2010 ONCA 457, made it clear that Mr. Zupnik still bore the onus of proving his claim.

In light of the multiple production requests and orders that were not followed, in particular relating to the general ledger, the Arbitrator drew an adverse inference that the records were not disclosed because they would show that Mr. Zupnik continued to operate his business. The Arbitrator concluded as follows:

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.

In her order, the Arbitrator dismissed outright Mr. Zupnik’s arbitration application.

III. ANALYSIS

Mr. Zupnik’s appeal relies almost entirely on State Farm’s misreading of the provisions for deducting collateral benefits and resulting improper termination of benefits as of March 31, 2008. He submits that State Farm raised the issue of post-accident income too late when it did not actually request documents until years later, so it is only now seeking justification for its improper failure to pay IRBs after March 31, 2008.

Regarding the termination, after receiving Mr. Zupnik’s IRB claim, State Farm asked for a report from Philip Turner, accountant. In his report of July 15, 2008, Mr. Turner determined that based on the 2007 fiscal year,² Mr. Zupnik’s base IRB per ss. 6(1) and (5) was $3,367.³ The payable IRB was therefore $400, being the lesser of the base IRB and the maximum payable pursuant to s. 7(1). The report was only for the period up to March 31, 2008 because of the collateral benefits, although Mr. Turner noted that should IRBs be payable after March 31, 2008, his calculations would require updating.

State Farm terminated the benefits on the assumption that the payable IRB of $400 a week was reduced by the collateral benefit of $8,000 a month – roughly $1,846 a week – to zero.

However, pursuant to s. 6(2), the payable IRB is not reduced by collateral benefits but rather by post-accident income. Rather, it is the base IRB as determined by ss. 6(1) and (5) that is reduced by the collateral benefit,⁴ which as already noted was $3,367 in this case: $3,367 minus $1,846 is still more than the maximum payable IRB of $400.

Mr. Zupnik submits the termination was in error, as even subtracting the LTDs from the base IRB still entitled Mr. Zupnik to the maximum payable IRB. Therefore, the Arbitrator was wrong to find that it was reasonable for State Farm to request further documentation, to make an adverse finding for the failure to produce that documentation, and to fail to address State Farm’s obligations under s. 35 to pay benefits that were only withheld due to its miscalculation.

In other words, had State Farm not terminated benefits for the wrong reason in 2008, the IRBs would have been paid, there would have been no dispute, and State Farm could not have come back years later to ask for production or seek repayment after it found out what Mr. Zupnik earned post-accident as he kept working.

However, while Mr. Zupnik focused on the wrong reason given for the termination of benefits and on the idea that State Farm could not retroactively withhold benefits for a failure to provide information, I agree with the Arbitrator that this was irrelevant once the matter was in arbitration. As the Arbitrator correctly pointed out, Stranges states that Mr. Zupnik still had to prove his case, including that he was unable to work and that his post-accident income did not result in reducing his IRBs to zero. He cannot simply allege that State Farm delayed in making a proper calculation of IRBs and therefore State Farm owes full benefits. In light of Stranges, it was also not necessary for the Arbitrator to discuss the obligation to pay set out in s. 35.

Therefore, Mr. Zupnik was required to produce certain information, as ordered by the pre-hearing arbitrator. When he did not produce documents in compliance with that order, the hearing Arbitrator had the right to draw an adverse inference, as set out in Rule 34.1(d) of the Dispute Resolution Practice Code.

The Arbitrator was consequently entitled to draw the adverse inference that the documents would show Mr. Zupnik’s continued receipt of income after the accident. In that regard, Mr. Zupnik earned nearly half a million dollars in 2008, mostly from the sale of the Lauderdale house in October 2008, but also from his share of the management fee. Given the adverse inference and Mr. Zupnik’s duty to clarify when the money was earned, the Arbitrator was not required to particularize exactly when that money was earned, other than it was earned post-accident.

The amount deductible from the amount of the payable IRB is “80 per cent of the net income received by the insured person in respect of any employment subsequent to the accident”: s. 6(2).

Mr. Zupnik submits that, if post-accident income is deductible from the payable IRB, he did not earn any income until the Lauderdale house sale in October 2008, so he is entitled to benefits up to then (ignoring the Arbitrator’s finding that he continued to work). However, Mr. Zupnik’s pre-accident income was annualized, based on the past fiscal year per s. 8(2)2, so post-accident income could equally be annualized.⁵ And Mr. Zupnik reported another $200,000 in personal income in 2009, as well as earning the $100,000 management fee. So even if he only earned $20,000 in net income between March 31, 2008 and January 5, 2009 – and the portion of the $100,000 management fee for that period would be about $75,000 – 80 percent of it deducted from the claimed IRBs would still leave zero.

Mr. Zupnik submits that the Arbitrator exceeded her jurisdiction in dismissing his claim in its entirety. However, IRBs and the special award were the only issues for the hearing pursuant to the pre-hearing letter of May 24, 2013, as the claim for housekeeping expenses was withdrawn. Since the Arbitrator found that no IRBs could be payable because of the deduction for the post-accident income, no special award could be payable either. But more fundamentally, of course, the Arbitrator found that Mr. Zupnik continued to work. IRBs are only payable if, as is stated in s. 4(1)1 of the SABS, within 104 weeks after the accident Mr. Zupnik suffered a substantial inability to perform the essential tasks of his pre-accident employment. Since based on the Arbitrator’s findings Mr. Zupnik failed the basic test of eligibility for IRBs, there was no reason to continue the arbitration proceeding. There would be no point to hearing any medical evidence, since IRBs are payable based on function, and Mr. Zupnik’s post-accident earnings evidence his continued ability to function. Accordingly, I find the Arbitrator did not exceed her jurisdiction in dismissing the claim outright.

In conclusion, the Arbitrator’s findings about Mr. Zupnik’s ability to work and earn post-accident income that reduced his IRBs to zero are findings of fact and not subject to appeal. State Farm was entitled to raise the issue of post-accident income as part of putting Mr. Zupnik to the proof of his case. The evidence of his post-accident activities and income showed that he had no case.

The appeal is therefore dismissed, and the Arbitrator’s decision is affirmed.

IV. EXPENSES

The parties agreed that the only relevant criterion for determining entitlement to appeal expenses is success. State Farm was successful, so it is entitled to its expenses. It prepared a Bill of Costs for preparation and attendance at the appeal hearing of around $2100. Mr. Zupnik submitted that expenses of between $1500 and $2000 would be appropriate. I find State Farm’s Bill of Costs reasonable and allow appeal expenses including HST of $2100.

September 16, 2016

David Evans Director’s Delegate

Date

Footnotes

1. 1The Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, Ontario Regulation 403/96, as it read immediately prior to April 1, 2016. For the purposes of this decision, I will use the present tense regarding the relevant pre-transition legislation, including the Insurance Act.
2. 2Gross income for the self-employed can be based on the most recent fiscal year: s. 8(2)2.
3. 3That is, 80% of net weekly income of $4,208.77, based on net profit before taxes of $380,744 in 2007.
4. 4S. 7(1)1. See Welsh and Economical Mutual Insurance Company, (FSCO P02-00024, October 7, 2003), which outlines the steps of determining the payable IRB and any resulting deductions for post-accident income, except that effective October 1, 2003, business losses are included in the calculation of the base IRB.
5. 5See for instance Falco and Continental Insurance Co., (FSCO A95-000485, A97-000207, June 13, 2000), where the Arbitrator preferred the insurer’s decision to “annualize” the insured’s post-accident income, rather than trying to match it week for week against his benefits. Upheld on appeal: FSCO P00-00038, May 15, 2002.