Holmes v. Desjardins Financial, 2014 ONSC 4695

COURT FILE NO.: CV-09-376116

DATE: 20140825

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Bonita Holmes / Plaintiff / Moving Party

AND:

Desjardins Financial Security Life Assurance Company / Defendant / Respondent

BEFORE: Justice Edward P. Belobaba

COUNSEL: Brad Pleavin for Ms. Holmes, Moving Party

Colin Baxter for Desjardins Financial, Responding Party

HEARD: August 12, 2014

ENDORSEMENT

Summary judgment motion interpreting insurance policy provisions

[1] In this motion for partial summary judgment, the plaintiff asks the court to interpret a payment provision in her insurance policy. The issue is whether CPP disability payments should be treated as a direct or indirect offset from the LTD entitlement under the policy. The plaintiff also seeks an interpretation of the cost of living indexation provision.

[2] For reasons set out below, I find that the CPP disability payment is a direct setoff. The policy provisions are clear and unambiguous in this regard. This means that in this case the plaintiff’s $683 monthly CPP payment must be deducted directly from her $1000 monthly policy entitlement, leaving a net monthly disability payment of $316 from the defendant insurer. I further find that the indexation provision refers to the net monthly payment that is actually paid out, i.e. the $316, not the $1000 policy entitlement.

[3] The plaintiff’s motion for summary judgment is therefore dismissed.

Background

[4] In November 1997, the plaintiff, Bonita Holmes, purchased a Solo Insurance Policy with a long-term disability (“LTD”) component from Imperial Life Financial, which later merged with the defendant Desjardins Financial.[^1] The policy provided that in the event of total disability, Ms. Holmes would be entitled to $1000 a month, subject to the co-ordination of other public and private benefits as described in the policy provisions. Two years later, in March 2000, the plaintiff suffered a severe stroke rendering her totally disabled. The defendant processed her claim and began sending her monthly LTD payments of $1000.

[5] In early June 2000, the plaintiff’s father sent a letter to the defendant inquiring about “how CPP benefits change your benefit.” On June 15, one of the defendant’s disability specialists advised in writing (as it turned out, incorrectly) that the CPP disability benefits would be deducted from the $1000 policy entitlement, but only to the extent that the sum of the two benefits exceeds the all-source maximum of 66.67% of the plaintiff’s gross monthly salary, which in 1998 was $2133. The defendant’s letter stated that the maximum amount of income that the plaintiff could receive from all sources could not exceed $1,422.29, which was two-thirds of her gross monthly salary:

In order to calculate any reductions, if Ms. Holmes is approved by C.P.P., we will add the approved monthly award to her current disability income of $1,000 per month and any amount in excess of $1,422.29 will be deducted from the Solo Disability benefit.

[6] In September 2000, the plaintiff was approved for CPP disability benefits in the amount of $683 per month, effective July 2000. Over the next several months, the defendant continued to treat the CPP benefit as an “indirect offset” – by noting the all- source income as $1683 ($1000 + $683) and subtracting any excess over the all-source maximum of $1422 from the $1000 policy benefit ($1000 - $261), thus resulting in a monthly disability payment of $739 from the insurer.

[7] In December 2000, the defendant concluded that a mistake had been made and advised the plaintiff that the CPP benefit was a “direct offset” to the LTD benefit and that her monthly LTD payment was being reduced to $316.62:

As you know, CPP benefits became effective July 1, 2000 in the amount of $683.38 per month and LTD benefits became effective May 24, 2000. As the CPP benefit is a direct off-set to the LTD benefit, an overpayment has occurred in the amount of $3,940.83 calculated as follows:

Original L.T.D Benefit = $1,000

Less CPP Benefit = $683.38

New Net Benefit = $316.62

[8] Four years later, in February 2005, the defendant further advised the plaintiff that the indexation of her monthly benefit had also been done incorrectly. The cost of living indexation should have applied only to the net benefit of $316, not to the gross benefit of $1000.

[9] In 2006, the plaintiff’s family filed a complaint with the insurance regulator in Manitoba where the plaintiff was living. The government regulator in turn wrote the following letter to the defendant insurer:

Ms. Holmes has provided our office with several copies of documentation relating to her disability claim through your company.

According to Ms. Holmes, it was her understanding that it was indicated in your letter of June 15, 2000 she was eligible for total benefits of at least $1,422.29. She indicated that you subsequently reduced her benefits to $1,000 in total less her C.P.P. benefits.

Upon review, it is apparent that Ms. Holmes remains unclear as to how your company has calculated her benefits to date and how these benefit payments relate in accordance with the terms of her contract…

[10] The defendant reviewed the file and advised the plaintiff that they stood by their decision to treat CPP disability payments as a direct offset. The plaintiff commenced this action in April 2009.[^2]

Position of the parties

[11] The plaintiff makes two arguments: first, that on a plain reading of the policy provisions, the CPP disability benefit should be treated as an “indirect offset” or “all-source” deduction and the cost of living indexation should be calculated on the gross $1000 LTD policy benefit and not on the net $316 payment; and alternatively, that the policy provisions in question are ambiguous about the nature of the offset (as confirmed by the obvious misunderstanding on the part of the defendants’ own representatives) and the doctrine of contra proferentem should apply. The plaintiff submits that she should receive a monthly payment of $1000, not $316.

[12] The defendant insurer says that the policy clearly provides that CPP benefits are a direct offset to the LTD policy amount payable. The direct offset of CPP benefits is standard practice in the Canadian LTD insurance industry. The error made by the defendant’s representatives in June 2000 was corrected by the insurer within several months and does not create contractual ambiguity. The defendant submits that the reduced monthly LTD payment of $316 is correct and is also the appropriate basis for the indexation provision.

[13] It is important to note that the plaintiff does not argue estoppel. She is not saying that the defendant insurer should be precluded from going back on its June 15, 2000 representation that the CPP benefit would be treated as an indirect rather than a direct offset. The estoppel argument would not succeed because the plaintiff would not be able to show detrimental reliance. The June 15, 2000 representation was made after she had become disabled. The plaintiff would not be able (and does not attempt) to show that she relied on the representation to her detriment – she did not change her position in any way.

[14] Thus, the only issue before me is one of contractual interpretation.

The applicable law

[15] In recent decisions,[^3] the Court of Appeal summarized the two phases of contractual interpretation process as follows. The first phase is the interpretive phase, the purpose of which is to discern the intention of the parties as gathered from the plain words used in the contract. In this phase, the court considers the contract as a whole and in the "commercial atmosphere in which the insurance was contracted."[^4] The interpretation should accord with sound commercial principles and good business sense, and avoid commercial absurdity.[^5] If the meaning is plain on the face of the contract, it is unnecessary to proceed further.

[16] However, if the interpretive phase results in two (or more) equally reasonable interpretations, the contract is ambiguous. The court then turns to the second phase of the inquiry. In this phase, the court may consider extrinsic evidence and the applicability of the doctrine of contra proferentem. However, one does not reach the second phase and the need to consider extrinsic evidence unless one first finds that there is ambiguity, i.e. two or more equally reasonable interpretations of the contractual provision in dispute.

[17] There is a further nuance that must be acknowledged: “Where the contract as written is ambiguous, extrinsic evidence can be admitted to resolve such ambiguity … [But] it must be an ambiguity that exists in the language as it stands, not one that is itself created by the evidence that is sought to be adduced.”[^6]

[18] The core issue on this motion is whether an ambiguity exists, and if so, whether it arises from the contractual language as it stands or the extrinsic evidence that is sought to be adduced – that is the June 15, 2000 letter and the defendant’s subsequent conduct. If ambiguity exists and arises from the contractual language, the plaintiff could well prevail; if ambiguity is created solely by the extrinsic evidence, she would not.

Analysis

[19] I begin by noting that the contractual interpretation issues raised herein are amenable to summary adjudication. I am confident that I can fairly and reasonably interpret the contractual provisions in dispute on the record before me. There is no need to use the so-called “new powers” under Rule 20.04(2.1). There are no genuine issues that require a trial.

[20] I find, for the reasons that follow, that the policy provisions in question are clear and unambiguous that CPP benefits are a direct offset from the LTD policy entitlement. There is no ambiguity and thus no need for any extrinsic evidence. I also find that this is an interpretation that accords with industry practice and has been judicially acknowledged. I hasten to add, however, that I do not rely unduly on the last two points. It is sufficient for the purposes of adjudication that on a plain reading of the policy provisions it is clear that CPP benefits will be treated as a direct offset, and that indexation will be calculated on the basis of the net benefit actually paid out (i.e. $316) and not on the amount of the policy entitlement (i.e. $1000).

(1) The policy provisions are clear and unambiguous

[21] Like most LTD insurance policies, the policy provisions herein provide for the co-ordination of benefits and attempt to describe a two-step reduction process. First, the policy amount is reduced by the amount of the CPP benefit; then, the amount actually paid out is capped by an “all-source” calculation.

[22] The two-step process was set out at the bottom of the first page of the plaintiff’s insurance application form:

In the event of total disability, the selected monthly amount is reduced by any initial benefit payable under … the Canada Pension Plan. In addition, the monthly benefit actually paid is reduced so the total of the benefits and any income received from other sources does not exceed 66 2/3% of the first $4,000 of gross insurable Income, and 50% of the balance; this income is based on the highest income of the last 2 complete taxation years immediately prior to the onset of the total disability.

[23] There is no ambiguity in the language of these provisions: the first sentence makes clear that the policy amount is reduced by any benefit payable under the Canada Pension Plan. The second sentence begins with “In addition,” and goes on to describe the second step which imposes an “all-source” maximum or cap. It may well be that the plaintiff never read the actual policy document. But she did read and fill out the insurance application, which under Clause 2 of the policy, forms part of the “entire contract” between the parties. I can therefore conclude that when she applied for insurance coverage, the plaintiff reasonably understood and expected that the CPP benefit would be treated as a direct offset from the $1000 LTD policy amount that she had selected.

[24] The two-step reduction process was again set out at page 15, sections 1(1) and (2) of the insurance policy as follows:

(1) An Insured who becomes Totally Disabled before age 65 is entitled, as of the first day following the expiry of the Elimination Period specified in the SCHEDULE OF BENEFITS, and in accordance with the provisions of this policy to a monthly disability benefit equal to the Sum Insured specified in the same Schedule, reduced by any of the following initial benefits or payments the Insured is entitled to receive, or would be entitled to receive had he made satisfactory application:

(c) Any amount payable under the Canada or Quebec Pension Plan.

(2) The monthly benefit actually paid by the Insurer to the Totally Disabled Insured is, however, reduced in such a way that the benefit is added to any income received from other sources does not exceed 66 2/3% of the first $4,000 in Gross Insurable Income and 50% of the balance; this income is based on the higher remuneration received in the last two full taxation years immediately prior to the onset of Total Disability. If the disability occurs before the completion of one full taxation year following the effective date of the Disability Insurance coverage, the income initially used to determine the Sum Insured specified in the SCHEDULE OF BENEFITS will be used. For the purposes of this provision, the other sources of income are the following benefits or payments which the Insured would be entitled to receive or would have received had he made satisfactory application:

(a) Any benefit payable by a government board or agency, excluding any cost of living increases after payments under this benefit begin.

[25] Note again that subsection (1) makes clear that the “monthly disability benefit equal to the Sum Insured” will be “reduced” by certain specified benefits or payments, such as “any amount payable under the Canada or Quebec Pension Plan.” Subsection (2) goes on to explain that “the monthly benefit actually paid by the Insurer to the Totally Disabled Insured”[^7] will be subject to an all-source calculation and maximum as described therein.

[26] In the plaintiff’s case, given the LTD insurance amount selected, her pre-disability annual income and the absence of any other income except for the LTD and CPP benefits, the all-source calculation described in subsection (2) does not apply to cap the amount of her benefits.[^8] That is, only subsection (1) applies to reduce the $1000 policy amount by the amount of the monthly CPP benefit.

[27] The plaintiff urges the court to find that the language in subsection (2) – “the benefits actually received, however, will be reduced in such a way that” – indicates that subsection (2) provides the sole mechanism or manner in which benefits will be coordinated. I do not understand this submission. The plaintiff asks the court to interpret subsection (2) in isolation, paying no regard whatsoever to the presence of subsection (1). However, as I have already noted, contractual interpretation must have regard to the contract as a whole, especially where, as here, there are two subsections that are clearly intended to follow one another.

[28] There is no patent ambiguity. Nor is there any latent ambiguity – that is, “where the language is equivocal, or if unequivocal … its application to the facts is uncertain or difficult.”[^9] Here, the language of the policy provisions in question is not equivocal and its application to the facts is not uncertain or difficult. In short, there is no basis and no need for extrinsic evidence.

[29] In my view, little more can be said about the intention or clarity in the so-called two-step reduction process set out in sections 1(1) and (2). I find it plain and unambiguous that the plaintiff’s monthly $683 CPP benefit must be deducted from the $1000 policy entitlement, and that the defendant was right to do so.

[30] The final issue is indexation. The indexation provision at page 15, section 1(8) reads as follows:

The benefits payable will be indexed on January 1st of each year after the beginning of Disability Insurance benefit payments for the same disability period if it is specified in the SCHEDULE OF BENEFITS. The indexation will be equal to the lesser of 4% and the annual rate of change in the Consumer Price Index as published by Statistics Canada for the 12-month period ending on the August 31st preceding the indexation. No negative indexation will be applied.

[31] Here again, the operative phrase is “the benefits payable” as opposed to the policy entitlement. The words “benefits payable” are not unlike the language in section 1(2), which refers to “the monthly benefit actually paid by the Insurer” and, again, is intended to differentiate the amount actually paid from the policy entitlement. In my view, the language in the indexation provision clearly provides that the costs of living adjustment will be on the benefit payable, i.e. the net benefit of $316, and not the gross benefit of $1000. This is simply not a case where I can, in good conscience, discern two equally reasonable interpretations. There is no ambiguity.

[32] In sum, I find on a plain and reasonable interpretation of the above policy provisions that CPP is indeed a direct offset and indexation is on the net $316 monthly benefit.

(2) Consistent with industry practice

[33] I note that the interpretation as set out above is consistent with insurance industry practice. The defendant presented extensive evidence that the direct offset of CPP benefits is an industry standard in the Canadian LTD insurance industry. The purpose of the basic reduction is to establish the provider of public benefits (such as CPP) as a first payer and the private insurers as subsequent payers. This “deduction” arrangement results in significantly lower insurance premiums, which in turn increases the affordability and availability of disability insurance to individuals such as Ms. Holmes who must pay the premiums themselves without any contribution from their employers.

[34] The defendant presented affidavits and research reports that explain and justify the industry practice in this regard. I am satisfied that private insurance premiums are calculated on the express premise that the Canada Pension Plan is the “first payer” for disabled workers and operates as a direct offset to any private LTD benefits under the insurance policy. One study found that the assumption that insured will make CPP applications allows insurers to lower their premiums by as much as 45 per cent. The direct offset of CPP benefits, with CPP acting as a “first payer,” appears to be an important component in the public-private disability insurance system.

(3) Industry practice judicially acknowledged

[35] I further note that the role of CPP as “first payer” and the importance of the “all-source maximum” calculation as an incentive to encourage the insured to return to work has been judicially recognized. In Ruffalo,[^10] the court considered and accepted evidence showing that private insurers take the CPP offset into account when setting the premiums. In Zotzman,[^11] the court described the all-source maximum clause as follows:

The purpose of the All Sources clause is to effectively define when and to what extent further deductions are to be made from the monthly disability benefit. Two points about this clause should be noted. First, it does not provide for any increase in the amount of the monthly disability benefit, but only for a reduction in the amount. Second, it is, despite its less than perfect wording, a clause which is fully engaged only when the amount of income a beneficiary receives from all sources exceeds [X]% of his earned income. I refer to that amount as the excess amount. Then and only then is the monthly disability benefit to be reduced and then only to the extent of the excess amount.

Viewed in this way, this clause does not conflict with the Basic Reduction clause. What it does do is to provide that where a beneficiary is receiving income from other sources, there will be a limit on the amount the beneficiary receives equal to [X]% of his earned income.

[36] I pause to note that the plaintiff took issue with some of the defendant’s evidence about industry practice and the implications of the case law just cited. However, the plaintiff did not present contrary evidence or case law. For my part, I am more than persuaded by the evidence presented by the defendant on both of these points, industry practice and judicial acknowledgement. But, as already noted, it is sufficient to base my contractual interpretation herein on a plain reading of the two-step reduction provisions and the indexation clause.

(4) The letter from the insurer

[37] I now come to the heart of the plaintiff’s case. The plaintiff argues that the defendant’s letter of June 15, 2000 and the six months of subsequent conduct on the part of the defendant (until the mistake was discovered and corrected) is “real world evidence” that the policy provisions in question were confusing and ambiguous, even to the defendant’s disability specialists. Consequently, this court must find ambiguity, apply the contra proferentem doctrine and allow the plaintiff to recover years of unpaid LTD benefits.

[38] In my view, the plaintiff’s submission turns the process of contractual interpretation on its head. The case law is clear that one can only consider extrinsic evidence (which potentially includes both the June 15 letter and the six months of subsequent conduct defendant[^12]) if one has first concluded that the contractual provisions are ambiguous, i.e. capable of two or more equally reasonable interpretations.[^13] The case law is also clear that you cannot use the extrinsic evidence to create the ambiguity. As Professor Fridman explains: “Where the contract as written is ambiguous, extrinsic evidence can be admitted to resolve such ambiguity … [But] it must be an ambiguity that exists in the language as it stands, not one that is itself created by the evidence that is sought to be adduced.”[^14]

[39] I have found the offset provisions to be plain and unambiguous. I did not find that the provisions in question were subject to two or more equally reasonable interpretations. I did not find any ambiguity. Therefore, there is no need for extrinsic evidence. The June 15, 2000 letter injects ambiguity, to be sure, but it is an ambiguity “that is itself created by the evidence that is sought to be adduced” and not “an ambiguity that exists in the language as it stands.”^15 The June 15, 2000 letter was also an error that was corrected as soon as it was discovered.

Conclusion

[40] I am not unsympathetic to the plaintiff’s plight. Ms. Holmes has been rendered totally disabled by a severe stroke. I have no doubt that she and her family could use the extra income that is being claimed herein. But the insurance policy provisions are clear. The CPP benefit is a direct, dollar for dollar, offset from the policy entitlement. And the indexation protection applies only to the “benefits payable” that is, the $316 monthly payment. The defendant insurance company is right.

Disposition

[41] The motion for summary judgment is dismissed;

[42] If counsel agree that the action should be dismissed in its entirety, they should forward a draft Order to this effect to my attention.

[43] Costs on the motion, as agreed to by counsel, are fixed at $27,000 all-inclusive, payable forthwith by Ms. Holmes to Desjardins Financial.

Belobaba J.

Date: August 25, 2014

[^1]: Nothing turns on the fact of the merger and there is no need to differentiate between the two insurers in these reasons. For ease of reference, I will assume that the defendant Desjardins Financial was the insurer throughout the entire time period in question.

[^2]: The two-year limitation issue was not raised by either side.

[^3]: Ventas Inc. v. Sunrise Senior Living Real Estate Investment Trust (2007), 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24 [Ventas]; and Lombard Insurance Ltd. v. Zurich Insurance Co., 2010 ONCA 292, 101 O.R. (3d) 371, at paras. 32-35.

[^4]: Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 10 (SCC), [1980] 1 S.C.R. 888, at 901.

[^5]: Ventas, supra note 3, at para. 24.

[^6]: Fridman, The Law of Contract in Canada, (6th ed. 2011), at 442-43.

[^7]: Emphasis added.

[^8]: The all-source maximum formula as set out in section 1(2) would not apply to “cap” the plaintiff on the facts herein. The maximum amount of all-source income that the plaintiff can receive is 66.67 percent of her gross monthly income which in 1999 was higher than in 1998: $2878 ($34,537 divided by 12), two-thirds of which was $1918. Thus, if one accepts the defendant’s submission, the plaintiff’s all-source total is $316 ($1000 - $683) which is well under the $1918 limit. The same result if one accepts the plaintiff’s submission – the all-source income would be $1683 ($1000+$683) which is also under the $1918 limit.

[^9]: Leitch Gold Mines Ltd. et al v. Texas Gulf Sulphur Co., 1968 405 (ON SC), [1969] 1 O.R. 469, at para. 229 (Ont. H.Ct.).

[^10]: Ruffolo v. Sun Life Assurance Co. of Canada, 2007 50284 (ON SC), [2007] O.J. No. 4541 (Sup. Ct. J.), at para. 51.

[^11]: Zotzman v. Mutual Life Assurance Company of Canada, 1993 ABCA 175, [1993] A.J. No. 341, at paras. 5-6, aff’d Allen v. Mutual Life Assurance Co. of Canada, [1999] I.L.R. I-3627 (Ont. Gen. Div.), at para. 11.

[^12]: “In Canada the rule with respect to subsequent conduct is that if, after considering the agreement itself, including the particular words used in their immediate context and in the context of the agreement as a whole, there remain two reasonable alternative interpretations, then certain additional evidence may be both admitted and taken to have legal relevance if that additional evidence will help to determine which of the two reasonable alternative interpretations is the correct one.” Re Canadian National Railways and Canadian Pacific Ltd. [1987] B.C.J. No. 1298 (B.C.C.A), at paras. 82-83. Here, of course, I did not find two reasonable alternative interpretations. Thus, the evidence of subsequent conduct (which is just another example of extrinsic evidence) cannot be considered.

[^13]: Recall the discussion above at paras. 15-16.

[^14]: Supra, note 6.