COURT FILE NO.: CV-16-555100 DATE: 20161222 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Applicant AND: TD HOME & AUTO INSURANCE COMPANY, TO DIRECT INSURANCE INC., TD GENERAL INSURANCE COMPANY and HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO AS REPRESENTED BY THE MINISTER OF FINANCE, Respondents

BEFORE: Stinson J.

COUNSEL: D'Arcy McGoey, for State Farm Mutual Automobile Insurance Company S. J. Sokol, for Her Majesty The Queen (a.k.a. Motor Vehicle Accident Claims Fund) Jillian Beaulieu, for TD Home & Auto Insurance Company et al

HEARD at Toronto: October 6, 2016

Endorsement

Background

[1] On May 4, 2013, Michele Basile, aged 26, suffered a serious brain injury when he lost control of his motorcycle and struck a concrete planter. No other vehicles were involved in the accident. He remained in a coma for 8 months. This case arises from the efforts of Michele’s parents to obtain statutory accident benefits (SABs) on his behalf.

[2] Michele’s wallet contained a pink insurance card listing TD Insurance as his insurer. As a result, while Michele was in a coma, his mother contacted TD on his behalf. TD’s position in these proceedings is that, well before the accident, its policy had been cancelled and thus TD is not responsible to pay Michele’s SABs. Despite its previous connection with Michele as his insurer, and its “pay first, dispute later” obligations under the Insurance Act, when approached by Michele’s mother, TD did not provide her with a SABs application package, did not process his SABs claim, and paid nothing.

[3] Michele’s parents then applied for SABs from his father’s car insurer, State Farm, premised on the theory that Michele was a member of their household who was principally financially dependent on his father and thus eligible for SABs coverage under that policy. State Farm processed the application and paid the SABs in the first instance. State Farm then commenced an arbitration involving TD and the Motor Vehicle Accident Claims Fund (MVACF) in order to resolve the issue of ultimate responsibility for paying Michele’s SABs. All of State Farm, TD and MVACF signed an Arbitration Agreement appointing Ken Bialkowski as arbitrator (the Arbitrator) to decide “all matters in dispute arising out of the issue as to liability to pay SABs to Michele Basile” as among them.

[4] As preliminary issues, the Arbitrator was asked to decide (1) whether Michele was principally financially dependent on his parents so as to make State Farm the priority insurer; (2) whether TD improperly “deflected” the claim; and (3) if so, what sanction was appropriate.

[5] In relation to issue (1) the Arbitrator concluded that Michele was not financially dependent on his parents. He therefore absolved State Farm of responsibility to pay.

[6] In relation to issue (2) the Arbitrator found that there was deflection in that TD improperly failed to forward an accident benefits package to Michele’s mother. He further found that, had TD done so, the application would have been submitted, thus triggering TD’s obligation to pay Michele’s SABs and then dispute its responsibility to do so.

[7] In relation to issue (3) the Arbitrator declined to accept the submissions of MVACF that TD should be fixed with permanent responsibility to pay Michele’s SABs due to its improper deflection and its failure to pay first and submit the issue of liability to arbitration. Instead, the Arbitrator imposed costs sanctions on TD. The Arbitrator left for subsequent resolution (by agreement or possible further hearing) the question whether the TD policy had been validly cancelled prior to the accident.

[8] MVACF now appeals the Arbitrator’s decision concerning issue (3), pursuant to s. 45(3) of the Arbitration Act, 1991, S.O. 1991, c. 17.

The SABs regime and the “Disputes Between Insurers" regulation

[9] Ontario's car insurance regime provides for the payment of SABs to individuals who are injured in motor vehicle accidents, regardless of fault. Responsibility for payment of SABs under that regime is governed generally by s. 268 of the Insurance Act, R.S.O. 1990, c. I.8 and O. Reg. 283/95: Disputes Between Insurers (DBI Reg.).

[10] Responsibility for paying SABs depends on the circumstances of the accident. For example, where an insured driver is injured, ordinarily the driver’s insurer pays. Where a pedestrian who has no car insurance is injured, ordinarily the SABs are paid by the insurer of the car involved in the accident. In situations where no insurance is available to respond and pay SABs, they are paid by MVACF.

[11] Sometimes disputes arise between insurers regarding who is responsible to pay SABs. So that the injured party will not suffer and be prejudiced by the potential nonpayment of benefits while the insurers sort out their dispute, Ontario's car insurance regime contains a provision for the interim payment of benefits by one party pending the outcome of the dispute, as well as a mechanism for the determination of such issues. This regime is governed by s. 268(2) of the Insurance Act, and the DBI Reg.

[12] In simple terms, the regime requires the first insurer who receives a claim for SABs to “pay first and dispute later” except where the claim was randomly or arbitrarily sent to that insurer (i.e. in a situation where there is no nexus between the claimant and the insurer). Thus, generally speaking, where there is a nexus, the first insurer who receives an application for SABs is responsible for paying them pending the resolution of any dispute as to which insurer is ultimately liable to pay them under s. 268: see s. 2.1 of the DBI Reg.

[13] The remaining provisions of the DBI Reg. address the process for resolution of disputes among insurers regarding responsibility to pay SABs. In simple terms, an insurer who receives an application for benefits is required to pay them and, within 90 days, give written notice to every other insurer that it claims is required to pay, including MVACF. The dispute is then determined by arbitration.

[14] A key provision of the DBI Reg. is s. 3(1), which addresses the consequences of the failure to give the necessary notice, as follows:

No insurer may dispute its obligation to pay benefits under section 268 of the Act unless it gives written notice within 90 days of receipt of a completed application for benefits to every insurer who it claims is required to pay under that section.

[15] One of the other issues that arises from time to time is the so-called wrongful “deflection” of claims for payment of SABs. This term is used to describe the conduct of an insurer who, despite being the first insurer to receive a claim for payment of SABs from a claimant with whom it has a nexus, does not pay them and initiate the dispute process, but instead leaves it to another insurer or MVACF to pay in the first instance. In s. 2.1(7) and s.7(6) the DBI Reg. addresses the powers of an arbitrator in relation to an insurer who fails to comply with the “pay first, dispute later” regime by “deflecting” a claim, as follows:

2.1 … (7) An insurer that fails to comply with this section shall reimburse the Fund or another insurer for any legal fees, adjuster's fees, administrative costs and disbursements that are reasonably incurred by the Fund or other insurer as a result of the non-compliance.

7. … (6) If the dispute relates to an accident that occurred on or after September 1, 2010, the failure of an insurer other than the Fund to comply with section 2.1 or 3.1 may be the subject of a special award made by the arbitrator.

[16] In summary terms, therefore, the regime provides for a “pay now and dispute later” obligation of payment on the first insurer who receives an application for SABs, coupled with the requirement to give notice initiating an arbitration within 90 days to other insurers or MVACF who are alleged to be properly responsible for paying the claim, in priority to the first insurer. The dispute in this appeal concerns the consequences arising from the conduct of an insurer who improperly deflects a claim and who fails to serve a notice under s. 3(1) within 90 days where, within the required timeframe, another insurer serves a notice and commences an arbitration.

The decision of the Arbitrator

[17] As I have noted, the Arbitrator concluded that State Farm was not the priority insurer. He further found that, given that TD had a nexus with Michele, it improperly deflected his SABs claim. Neither of those conclusions is in dispute on this appeal. What is contentious is whether the Arbitrator erred in imposing only a costs sanction and in failing to find that TD should be fixed with permanent responsibility to pay Michele’s SABs, due to its conduct in deflecting Michele’s SABs claim and in failing to issue a s. 3(1) notice within 90 days of the contact from Michele’s mother.

[18] Before the Arbitrator, MVACF argued that, where an insurer improperly deflects or diverts a claim for accident benefits, it will be held liable to pay the benefits on a permanent basis. As authority for that submission MVACF relied on Zurich Insurance Co. v. Chubb Insurance Co. of Canada, 2015 SCC 19. The Arbitrator analyzed the reasoning of the various levels of courts in that case, and concluded that it did not stand for that proposition.

[19] MVACF also relied upon Lombard Canada Ltd. v. Royal & SunAlliance Insurance Co. (2008), 94 OR (3d) 62 (S.C.). The Arbitrator dealt with that submission and distinguished that case as follows:

In that case, the claimant was operating a friend's vehicle. The vehicle had previously been insured with Lombard, but the policy had been cancelled. Following the accident, a claim for accident benefits was made to Lombard, which denied on the basis that their policy had been cancelled. Lombard did not put the MVACF on notice within 90 days as required by the legislation. The court held that sufficient nexus existed for Lombard to have been obligated to pay the claim and then dispute. By not meeting the notice requirements, it was not allowed to pursue the MVACF for indemnity. In my view the case before me is distinguishable from the facts in Lombard. After TD failed to send an accident benefits package to the claimant, State Farm did begin paying benefits. State Farm put both TD and the MVACF on notice of the priority dispute well within the 90 days required by the legislation. State Farm then commenced the present arbitration as against both TD and the MVACF to determine priority. In my view, TD, even if found to be responsible for payment of the accident benefits by reason of being deemed the first insurer to have received a completed application, could claim in the present arbitration as against MVACF in a fashion similar to a crossclaim in a civil case and therefore not [sic] defeated by any obligation to put another insurer on notice within 90 days.

[20] On this basis, the Arbitrator concluded that TD’s deflection and failure to serve a s. 3 notice within 90 days were not fatal to its position that it should not be required to pay the benefits and did not preclude the Arbitrator from imposing liability on MVACF.

[21] The Arbitrator also considered a line of cases which had essentially held that the legislation provided no time limit on a second-tier insurer putting a third tier insurer on notice. He went on to conclude:

In the circumstances, the facts in the case before me are different than those in Zürich and TD is not in a position where it is precluded from pursuing indemnity against the MVACF by reason of a missed limitation in providing notice of dispute.

[22] In addition, the Arbitrator considered Wawanesa Mutual Insurance Co. v. Lombard Canada, 2010 ONCA 383. In that case, the arbitrator had held (following the decision of the Court of Appeal in Kingsway General Insurance Co. v. Ontario (Minister of Finance) (2007), 2007 ONCA 62, 84 OR (3d) 507) that “a breach of sections 2 and 3 [of the DBI Reg.], while a serious matter that deserves sanction, does not result in an insurer automatically being required to pay benefits to the claimant forever." On appeal in the first instance, that conclusion was expressly approved by Belobaba J.: see 2009 CarswellOnt 9124 at para 1. On further appeal, the Court of Appeal quoted the same language and found no error in the reasoning and results below.

[23] In light of this jurisprudence, the Arbitrator did not consider himself bound to impose on TD the sanction of requiring it to pay Michele’s SABs permanently.

[24] The Arbitrator went on to observe that, subsequent to the accidents in issue the cases discussed above, but before Michele’s accident, there was an amendment to the DBI Reg. That amendment inserted an express sanction in the case of an insurer’s breach, such as by deflection, by the introduction of s. 2.1(7).

[25] The Arbitrator concluded that the conduct of TD should not be condoned and that a sanction was warranted. He therefore applied s. 2.1(7) and directed that TD pay the full indemnity costs of both MVACF and State Farm as well as the Arbitrator's costs with respect to the proceeding to date. He directed counsel to contact him to discuss possible arrangements for a further hearing regarding the TD cancellation issue, in the event the parties were unable to resolve that issue.

Issues and Analysis

The standard of review

[26] The first issue that needs to be addressed is the standard of review. The recent decision of the Court of Appeal in Intact Insurance Co. v. Allstate Insurance Co. of Canada, 2016 ONCA 609 addresses this topic as follows (at para. 53):

In general, an appeal to the Superior Court from an insurance arbitration regarding a priority dispute will engage questions of mixed fact and law that must be reviewed for reasonableness. Even if the appeal involves an extricable question of law regarding SABS, a reasonableness standard of review will still generally apply. In the unlikely scenario that the issue before the insurance arbitrator is an “exceptional” question (one of jurisdiction, a constitutional question, or a general question of law that is both of central importance to the legal system as a whole and outside the adjudicator’s specialized area or expertise), a correctness standard of review may be applicable.

Reasonableness

[27] The next question to address is whether the decision of the Arbitrator to impose a costs penalty only and not to require TD to pay Michele’s SABs permanently, is reasonable.

[28] The concept of reasonableness in judicial review was described in Dunsmuir v. New Brunswick, 2008 SCC 9 (at para 47) as follows:

Reasonableness is a deferential standard animated by the principle that underlies the development of the two previous standards of reasonableness: certain questions that come before administrative tribunals do not lend themselves to one specific, particular result. Instead, they may give rise to a number of possible, reasonable conclusions. Tribunals have a margin of appreciation within the range of acceptable and rational solutions. A court conducting a review for reasonableness inquires into the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.

[29] Based upon Lombard Canada v. Wawanesa Mutual Insurance Company and Kingsway General Insurance Company v. Ontario (both discussed above and considered by the Arbitrator), there is appellate authority for the proposition that a breach of ss. 2 and 3 of the DBI Reg. does not result in an insurer automatically being required to pay benefits to the claimant forever. To this extent, the Arbitrator’s decision “falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.”

[30] In Kingsway General, at para. 24, the court indicated that, in determining the appropriate sanction, an arbitrator should consider not only the effect of the breach of s. 2 of the DBI Reg., but as well the effect of the first insurer’s failure to give timely notice of its intention to dispute its liability to pay in accordance with s. 3. In the present case, the arbitrator took into account the fact that all parties had notice of the claim early on and were participants in the dispute process from the beginning. They all had the opportunity to investigate and assess the claim for SABs. He reasoned that the situation involving TD and MVACF was analogous to a cross-claim in a civil case. He also took into account the availability of a sanction against TD for failing to discharge its s. 2 obligations, and imposed one. Finally, the Arbitrator left it to subsequent submissions to determine the question whether the TD policy was in force at the relevant time. Therefore, in reaching his conclusion, the Arbitrator considered appropriate relevant factors.

[31] In my view, in all respects the Arbitrator’s decision was justified, transparent and intelligible. It follows that it meets the standard of reasonableness.

Jurisdictional error

[32] Finally, MVACF submits that the Arbitrator’s decision is nevertheless reviewable on the ground that it involved an “exceptional” question, relating to the Arbitrator’s jurisdiction. MVACF submits that the effect of the decision was tantamount to the creation of a right to arbitrate (and to assert a claim against MVACF) despite TD’s failure to serve a timely notice under s. 3 of the DBI Reg. MVACF argues that by purporting to allow TD to pursue a claim that was not provided for under the regulation, the Arbitrator exceeded his jurisdiction. MVACF argues that this jurisdictional error should be reviewed on a standard of correctness.

[33] I do not accept that submission.

[34] The basis for the potential imposition of liability on MVACF to pay the SABs claim is the notice of dispute and submission to arbitration initiated by State Farm. It is true that TD failed to pay the claim and proceed with a notice of dispute as it was required to do. The fact remains, however, that State Farm initiated the dispute process within the 90 day window. That process is designed to determine who, among various potential payors, will ultimately be found to be responsible to pay the claim. In effect, once the notice of dispute was served by State Farm, the issue of which party would bear responsibility for the claim was in play before the Arbitrator. Thus I do not agree that, in approaching the matter as he did, the Arbitrator created a right that did not previously exist under the governing legislation.

[35] I therefore do not consider that, by disposing of the matter as he did in his interim decision, the Arbitrator committed a jurisdictional error. The determinations he made were within the scope of the authority conferred upon him by the Insurance Act, the DBI Reg. and the Arbitration Agreement signed by the parties and were reasonable.

Conclusion and Disposition

[36] For these reasons, I conclude that MVACF’s appeal should be dismissed.

[37] In relation to costs, I encourage the parties to reach agreement. If they are unable to do so, I direct as follows:

(a) TD shall serve its bill of costs on MVACF, accompanied by written submissions, within 30 days of the release of these reasons. If State Farm seeks costs, it shall serve its bill of costs and written submissions within the same time frame.

(b) MVACF shall serve its response on TD and State Farm within 15 days thereafter. I invite MVACF to submit the bill of costs it would have submitted, had it prevailed in the appeal.

(c) TD and State Farm may, but are not obliged to, serve a reply, within ten days thereafter.

(d) In all cases, the written submissions shall be limited to three double-spaced pages, plus bills of costs.

(e) I direct counsel for TD to collect copies of all parties' submissions and arrange to have that package delivered to me in care of Judges' Administration, Room 170 at 361 University as soon as the final exchange of materials has been completed. To be clear, no materials should be filed individually: rather, counsel for TD will assemble a single package for delivery as described above.

Stinson J. Date: December 22, 2016