FINANCIAL SERVICES TRIBUNAL

Citation: Khamba v. Ontario (Superintendent Financial Services) 2018 ONFST 22 Decision No. I0782-2018-1 Date: 2018/10/12

IN THE MATTER OF the Insurance Act, RSO 1990, c I.8, as amended (the “Act”), and, in particular, sections 441.1, 441.2 and 441.3 of the Act;

AND IN THE MATTER OF a Notice of Proposal to Impose an Administrative Penalty dated January 24, 2018 issued by the Executive Director, Licensing & Market Conduct Division by delegated authority from the Superintendent of Financial Services;

AND IN THE MATTER OF a Request for Hearing in accordance with subsection 441.3(5) of the Act.

B E T W E E N:

NIRMAL KHAMBA

APPLICANT

and

SUPERINTENDENT OF FINANCIAL SERVICES

RESPONDENT

BEFORE:

Christopher Portner Member of the Tribunal and Chair of the Panel

APPEARANCES:

For the Applicant – Self Represented

For the Respondent – Michael Spagnolo

DATE HEARD: August 24, 2018

REASONS FOR DECISIONS

I. INTRODUCTION

1The Applicant in this matter, Nirmal Khamba (“Mr. Khamba”), was, at all relevant times, the holder of a life insurance and accident and sickness insurance agent licence. On January 24, 2018, the Superintendent of Financial Services (the “Superintendent”) issued a Notice of Proposal (“NOP”) in which he proposed to impose an administrative monetary penalty (“AMP”) in the amount of $2,000 on Mr. Khamba pursuant to section 441.3 of the Act for failing to have the errors and omissions (“E&O”) insurance required pursuant to clause 13(a) of Ontario Regulation 347/04 for two periods of time totalling 14.5 months.

2An oral hearing was held before the Tribunal on August 24, 2018 as a result of a Request for Hearing filed by Mr. Khamba with the Registrar on February 21, 2018.

3Mr. Khamba did not challenge the Superintendent’s allegation but submitted that the proposed amount of the AMP is excessive in light of the circumstances. For the reasons that follow, I do not agree with the amount of the AMP proposed by the Superintendent and direct the Superintendent to impose an AMP in the amount of $1,000 instead.

II. ISSUES

4Based on the Pre-Hearing Conference Memorandum that was prepared for this proceeding, the following two issues were argued before the Tribunal:

a. Is the imposition of the proposed administrative monetary penalty appropriate under subsection 441.3 of the Act and will it serve the purposes of subsection 441.2(1) of the Act?

b. If the answer to issue (a) is yes, what is the appropriate quantum of the penalty taking into consideration the five criteria prescribed by section 4 of Ontario Regulation 408/12?

III. FACTS

5The essential facts in this proceeding are not in dispute. The parties filed, on consent, an Agreed Statement of Facts and an Agreed Book of Documents which were accepted by the Tribunal into evidence. In addition, the Tribunal heard oral testimony from Mr. Khamba.

6Based on its review of the evidence, including Mr. Khamba’s testimony, the Tribunal makes the following findings of fact:

a. Mr. Khamba is licensed as a Life Insurance and Accident Sickness Insurance Agent with Licence Number 04081410. Mr. Khamba was first licensed on February 2, 2004.

b. Following an examination of Mr. Khamba’s insurance business on May 15, 2017 by a Senior Compliance Officer from the Financial Services Commission of Ontario (“FSCO”), it was determined that Mr. Khamba did not have E&O insurance coverage which had expired on January 1, 2017.

c. Mr. Khamba obtained valid E&O insurance on May 30, 2017.

d. On August 18, 2017, Mr. Khamba submitted an application to renew his Life Insurance and Accident Sickness Insurance licence. The application was referred to a Licensing and Registration Specialist at FSCO for review.

e. During the course of the foregoing review, it was determined that Mr. Khamba did not have E&O insurance from January 2, 2016 to September 14, 2016.

f. Mr. Khamba was without E&O insurance from January 2, 2016 to September 14, 2016 and from January 1, 2017 to May 29, 2017.

g. Mr. Khamba was seriously sick with a heart issue during the above-noted periods of time as the result of which Mr. Khamba forgot to renew his E&O insurance.

h. Mr. Khamba did not write any insurance policies for the seven year period preceding the NOP.

IV. STATUTORY FRAMEWORK

7The authority of the Superintendent to impose an AMP on an insurance agent is established by sections 441.2 and 441.3 of the Act. When read together, these provisions authorize the Superintendent to impose an AMP provided that the following three conditions are satisfied:

a. First, the agent is contravening or not complying with or has contravened or failed to comply with (i) a provision of the Act or the regulations as may be prescribed; (ii) a condition of his or her licence; (iii) a requirement imposed by order; or (iv) an obligation assumed by way of an undertaking.

b. Second, the penalty is intended to promote compliance with the requirements established under the Act or to prevent the agent from deriving, directly or indirectly, any economic benefit as a result of contravening or failing to comply with a requirement established under the Act.

c. Third, the Superintendent notifies the agent beforehand and provides him or her with details of the contravention or failure to comply and the proposed fine, as well as information about his or her right to request a hearing before the Tribunal.

8Section 13 of Ontario Regulation 347/04 requires that an insurance agent maintains E&O coverage of at least $1.0 million. There is no exception for insurance agents who are not working.

9With respect to the quantum of the proposed AMP, paragraph 3(2)(b) of Ontario Regulation 408/12 and Item 26 of Schedule 2 of the same Regulation empower the Superintendent to impose a monetary penalty of up to $50,000 on an individual who has failed to comply with the requirement to maintain E&O insurance. Section 4 of the same Ontario Regulation provides that the Superintendent is authorized to determine the amount of the penalty under section 441.3 of the Act up to the foregoing limit having regard to the following five criteria:

1. The degree to which the contravention or failure was intentional, reckless or negligent.

2. The extent of the harm or potential harm to others resulting from the contravention or failure.

3. The extent to which the person tried to mitigate any loss or to take other remedial action.

4. The extent to which the person derived or reasonably might have expected to derive, directly or indirectly, any economic benefit from the contravention or failure.

5. Any other contraventions of or failures to comply with a requirement established under the Act or with any other financial services legislation of Ontario or of any jurisdiction during the preceding five years by the person, O. Reg. 408/12, s. 4(2).

10Subsection 441.3(6) of the Act provides that the Tribunal may, by order, direct the Superintendent to carry out the proposal, with or without changes, or substitute its opinion for that of the Superintendent.

V. ANALYSIS

11Mr. Khamba clearly failed to maintain E&O insurance for the periods from January 2, 2016 to September 14, 2016 and from January 1, 2017 to May 29, 2017 while licensed as a life insurance and accident and sickness insurance agent under the Act and thereby failed to comply with subsection 392.8(1) of the Act section 13(a) of Ontario Regulation 347/04.

12As noted in paragraph [4] above, there are two issues to be decided in this proceeding, with respect to which the Tribunal finds as follows:

Issue (a): Is the imposition of the proposed administrative monetary penalty appropriate under subsection 441.3 of the Act and will it serve the purposes of subsection 441.2(1) of the Act?

13Subsection 441.3(1) of the Act states that an AMP may be imposed to either promote compliance with the Act or to prevent a person from deriving, directly or indirectly, any economic benefit as a result of contravening or failing to comply with the Act.

14As stated by the Tribunal in White¹:

The imposition of a general AMP on a licensee who fails to comply with the E&O requirement meets the two purposes listed in section 441.2(1) of the Act. First, the penalty has a deterrent value, both for the licensee and for other life insurance agents. Second, the penalty prevents the licensee from making any premium savings.²

15The Tribunal also held in White that the E&O requirement attaches to the licence itself and that all licensed life insurance agents must meet the requirement whether or not they conduct any life insurance business.³

16Mr. Khamba submits that he forgot to renew his E&O insurance as a result of his serious illness, a fact that is not in dispute, and has requested that no AMP be imposed on him. As the Tribunal stated in Beeksma⁴, “…once it is established that a licensee has contravened the E&O requirement, this person faces a difficult challenge: to convince the Tribunal that a general AMP is not an appropriate sanction.”

17As there is no exemption under the Act for the requirement that agents maintain E&O insurance, even compelling circumstances such as those relating to Mr. Khamba cannot obviate the statutory requirement. As noted in White, “An agent must either comply with the requirement or surrender his or her license.”⁵ That said, compelling circumstances may affect the quantum of the penalty, an issue which I address below.

18For the foregoing reasons, the Tribunal finds that the answer to Issue (a) is yes.

Issue (b): If the answer to issue (a) is yes, what is the appropriate quantum of the penalty taking into consideration the five criteria prescribed by section 4 of Ontario Regulation 408/12?

19As noted in paragraph [10] above, the Superintendent is authorized to determine the amount of the penalty under section 441.3 of the Act having regard to the following five criteria:

1. The degree to which the contravention or failure was intentional, reckless or negligent. In his written submissions, the Superintendent submits that Mr. Khamba’s failure to maintain continuous E&O coverage while he held a valid insurance agent’s licence was reckless and/or negligent but provided no evidence to that effect other than the admitted fact that Mr. Khamba did not have E&O insurance for two separate periods in 2016 and 2017. I found Mr. Khamba’s evidence to be entirely credible and quite straightforward. He was seriously ill for a lengthy period of time and did not remember to renew his E&O insurance as a result. That might constitute negligent behavior but it is not reckless behaviour.

2. The extent of the harm or potential harm to others resulting from the contravention or failure. As Mr. Khamba did not write any policies of insurance for a period of seven years, the Superintendent acknowledged in his written submissions that there did not appear to be any actual harm resulting from Mr. Khamba’s contravention. The Superintendent does submit, however, that there was a risk of potential harm as Mr. Khamba would have been able to transact insurance business without having the necessary E&O insurance in place given that his licence remained valid. I find that Mr. Khamba’s failure to maintain E&O insurance resulted in potential harm.

3. The extent to which the person tried to mitigate any loss or to take other remedial action. There is no evidence that Mr. Khamba took any steps to mitigate loss or take other remedial action. He only renewed his E&O insurance after being informed that it had lapsed during a life insurance agent business examination conducted by FSCO.

4. The extent to which the person derived or reasonably might have expected to derive, directly or indirectly, any economic benefit from the contravention or failure. Although it is an accepted fact that Mr. Khamba did not write any insurance policies for a period of seven years, the Superintendent submits that he derived an economic benefit from the contravention by not paying any premiums for E&O insurance when he was required to do so. I agree with the Superintendent’s foregoing submission, however, no evidence was provided by the Superintendent with respect to the amount of that benefit.

5. Any other contraventions of or failures to comply with a requirement established under the Act or with any other financial services legislation of Ontario or of any jurisdiction during the preceding five years by the person. As acknowledged by the Superintendent in his written submissions, there is no evidence that Mr. Khamba contravened a requirement under the Act at any other time during the preceding five years.

20Based on the foregoing analysis and findings, I conclude that an AMP is appropriate even though it is Mr. Khamba’s first offence and notwithstanding the fact that Mr. Khamba did not work during the relevant period of time. I also conclude that, while the $2,000 amount proposed by the Superintendent in the NOP is generally consistent with the amounts previously ordered by the Tribunal in comparable circumstances, such as Dennis - $1,700⁶, Manigbas - $2,000⁷, Srivastava - $1,650⁸and Khan - $1,700⁹, it does not, as it should in my view, take into account the exceptional circumstances in this matter.

21In light of Mr. Khamba’s serious illness and the fact that he did not write any policies of insurance during a seven year period, including the period of time in question, I find that an AMP in the amount of $1,000 would be appropriate and substitute that amount for the amount proposed by the Superintendent in the NOP. An AMP in the amount of $1,000 is substantial enough to promote compliance with the Act and ensure that Mr. Khamba does not benefit economically from his contravention.

V. ORDER

22The Tribunal orders the Superintendent to impose an administrative monetary penalty on Mr. Khamba in the amount of $1,000.

Dated at Toronto, this 12th day of October, 2018.

“Christopher Portner” Christopher Portner

Footnotes

1. 1White v. Ontario (Superintendent Financial Services), 2014 ONFST 9.
2. 2White, op. cit. at paras. 24 to 25.
3. 3White, op. cit. at para. 23.
4. 4Beeksma v. Ontario (Superintendent Financial Services), 2016 ONFST 3 at para. 24.
5. 5White, op. cit. at para. 23.
6. 6Dennis v. Ontario (Superintendent Financial Services) 2016 ONFST 18.
7. 7Manigbas v. Ontario (Superintendent Financial Services) 2017 ONFST 8.
8. 8Srivastava v. Ontario (Superintendent Financial Services) 2017 ONFST 11.
9. 9Khan v. Ontario (Superintendent Financial Services) 2018 ONFST 3.