By Janet L. Olsen, CA, CFE

On February 8, 2008, the Financial Services Commission of Ontario (“FSCO”) rendered their decision in the matter of James Johnston and AXA Insurance (Canada) (“AXA”) (FSCO A04-002670) (“Johnston decision”) , followed by their decision in the matter of Connie Lisowecki and Dominion of Canada General Insurance Company (“Dominion”) (FSCO A07-000610) (“Lisowecki decision”) on May 5, 2008. The one thing these two decisions have in common is the Arbitrator’s findings that the Applicants shall each receive a “Special Award” as a result of their insurer’s approach to the quantification of the weekly income replacement benefits (“IRBs”) payable to them as a result of their motor vehicle accidents.

Subsection 282(10) of the Insurance Act defines the parameters for a “Special Award” and provides that “If the arbitrator finds that an insurer has unreasonably withheld or delayed payments, the arbitrator, in addition to awarding the benefits and interest to which an insured person is entitled under the Statutory Accident Benefits Schedule (“SABS”), shall award a lump sum of up to 50 per cent of the amount of which the person was entitled at the time of the award together with interest on all amounts then owing to the insured (including unpaid interest) at the rate of 2 per cent per month, compounded monthly, from the time the benefits first became payable under the Schedule”.

Arbitrator Robert Bujold observed that AXA “unreasonably withheld” IRBs from Mr. Johnston for almost two years by virtue of the fact that they did not take the necessary steps to quantify Mr. Johnston’s post-accident losses from self-employment. Arbitrator Jeffrey Rogers found that “Dominion's conduct, in calculating the quantum of Ms. Lisowecki's IRBs was unreasonable, resulting in unreasonable delay in paying the additional IRBs owed” as it related to the impact that her pre-accident losses from self-employment had on the magnitude of her IRB. In both cases, the insurers were held to the standard that they must mindfully apply the most recent jurisprudence as it relates to the quantification of a claimant’s IRB.

At issue in ordering the “Special Award” in the matter of Johnston and AXA was AXA’s interpretation of section 7 of the SABS. Mr. Johnston was self-employed at the time of his motor vehicle accident on December 12, 2000. Following the accident, Mr. Johnston incurred losses from self-employment as a result of the accident, which are included in the quantification of his weekly income replacement benefit, pursuant to subsection 6(5) of the SABS. As Mr. Johnston was self-employed, AXA hired an accountant to assist in the quantification of his IRB. From the outset of the claim, both AXA and, independently, their accountant made Mr. Johnston aware of their position that losses from self-employment could not be used to increase the amount of his IRB beyond his policy maximum of $400 per week and, even though he was incurring sizeable losses following the accident, commenced to pay him $400 per week.

AXA’s position was contrary to the literal reading of section 7 of the SABS and, as a result, was subject to much debate at the time – so much so that the question was first decided at FSCO on August 16, 2002 in the matter of Robert L. Welsh and Economical Mutual Insurance Company (FSCO A01-000916) (“Welsh decision”). The Welsh decision served to confirm AXA’s position in this regard vis-à-vis Mr. Johnston’s post-accident losses from self-employment.

In June 2003, a post-104 week Disability DAC concluded that Mr. Johnston was completely unable to engage in any employment for which he was reasonably suited by education, training or experience and, therefore, confirmed his ongoing entitlement to IRBs. AXA’s accountant was asked to update their calculations of Mr. Johnston’s IRB and was provided with preliminary information necessary to do so in September 2003. Shortly thereafter, on October 7, 2003, FSCO issued their Appeal Order to the Welsh decision whereby they overturned the Arbitrator’s finding and concluded that business losses could increase the IRB to more than $400 per week (Appeal P02-00024) (“Welsh appeal”).

Mr. Johnston retained his own accountants to quantify his post-accident losses from self-employment and, on February 19, 2004, he forwarded their findings that he had incurred weekly post-accident losses from self-employment as a result of the accident of $5,918.76 and $3,191.99 for the periods January 1st to December 31, 2001 and January 1st to May 31, 2002, respectively, and that additional calculations would be provided in respect of the weekly losses he had incurred subsequent to May 31, 2002.

At no time after the release of the Welsh appeal did AXA advise Mr. Johnston that he was entitled to be reimbursed for 80% of his business losses in excess of $400 per week. Further, there was no explanation as to why, between September 2003 and June 2004 and then from between October 2004 and September 2005, AXA and their accountants had not recalculated Mr. Johnston’s IRB. Finally, AXA submitted a copy of an accountant’s report, dated January 30, 2006, from their new accountant, which indicated that AXA owed Mr. Johnston $252,879 for the period January 1, 2001 to February 26, 2006, excluding interest, owing to his post-accident losses from self-employment. Yet still no IRBS were paid to Mr. Johnston and further accounting reports ensued as the matter approached arbitration.

However, from the arbitrator’s perspective, “AXA’s conduct … following the appeal decision in Welsh, was at best a half-hearted effort to at first obtain and then proceed with available information and documentation to assess Mr. Johnston’s post-accident income losses from self-employment…AXA, though wrong, did not act unreasonably when it initially calculated Mr. Johnston’s IRB benefits on the basis that post-accident business losses from self-employment could not result in a weekly benefit of more than $400 per week. As well, AXA was entitled … to request financial documents related to those [Mr. Johnston’s] businesses. Eventually, however, the law was clarified, and it also became clear that no further documentation was available”. As a result, AXA’s “failure to pay at least an approximation of what was due, based on the available documents, was ‘unreasonable’ from 14 days following the release of the Welsh decision on October 7, 2003”.

Of course the issue of the amount of compound interest payable at the rate of 2% per month, compounded monthly, pursuant to section 46 of the SABS, was an additional subject of discussion in the Johnston decision, which also served to increase the magnitude of the “Special Award”. However, the arbitrator’s approach in this regard would appear to be at odds with the premise that “AXA, though wrong, did not act unreasonably when it initially calculated Mr. Johnston’s IRB benefits on the basis that post-accident business losses from self-employment could not result in a weekly benefit of more than $400 per week”. By virtue of AXA’s initial interpretation of section 7 of the SABS, which limited the IRB they would pay to Mr. Johnston to $400 per week, they did not believe it necessary to investigate, calculate, update and determine the cause of his ongoing post-accident losses from self-employment, which was also at issue in the decision. Surprisingly, however, the arbitrator ordered that interest first commence to become payable from November 20, 2001, approximately two years prior to the Welsh appeal. That being said, the arbitrator’s point is well taken that had Mr. Johnston’s post-accident revenues and expenses from self-employment been revisited regularly throughout the life of his claim for IRBs, not only in terms of gathering and examining the documentation necessary to update the calculations but also in consideration of the evolution of the jurisprudence as it relates to quantum, a number of the issues that made their way to the arbitration may well have been avoided.

At issue in ordering the “Special Award” in the matter of Lisowecki and Dominion was Dominion’s deduction of Ms. Lisowecki’s pre-accident losses from self-employment in their determination of 80% of her net weekly pre-accident income from employment for IRB purposes. In the year before the accident, Ms. Lisowecki was employed for a period, then received Employment Insurance (“EI”) benefits for a period. She then became self-employed and had been so for approximately five months prior to her accident, a period during which she incurred self-employment losses.. While she was self-employed, Ms. Lisowecki also received ‘special’ EI benefits, paid by EI under its self-employment assistance program.

As Ms. Lisowecki, like Mr. Johnston, was self-employed, Dominion retained an accountant to assist them with the calculation of her IRB. The accountant predicated a calculation of 80% of Ms. Lisowecki’s net weekly pre-accident income from employment, including self-employment, in the 52 week period prior to the accident on (1) her income from employment, plus (2) both the regular and the special EI benefits that she received, minus (3) her losses from self-employment, as per the Report that they issued to Dominion, dated November 28, 2005. However, more than two years prior to the date of the accountant’s report, on August 25, 2003, Arbitrator William J. Renahan found in the matter of Marilyn Henderson-Briehl and ING Insurance Company of Canada (FSCO A01-001620) (“Henderson-Briehl decision”) that the SABS did not permit the deduction of Ms. Henderson-Briehl’s pre-accident losses from self-employment from her pre-accident income from employment, based on a fact pattern almost identical to that of Ms. Lisowecki. Despite this ruling, Dominion paid Ms. Lisowecki an IRB predicated on the calculations contained in their accountant’s report.

Arbitrator Rogers referred to Dominion’s action as “imprudent” and that “it was unreasonable for Dominion to accept [their accountant’s] approach to calculating entitlement that was at odds with the only jurisprudence on the issue. Although Dominion is not required to have the technical expertise to make the calculations, it is expected to know and apply the law”. To make matters worse, Ms. Lisowecki sent an email to Dominion on March 9, 2006 in which she requested that her IRB be recalculated with specific reference to the Henderson-Briehl decision. Dominion forwarded her request to their accountant. It would appear that the accountant did not believe, theoretically, that Ms. Lisowecki’s request had merit. “Although not stated directly, the inescapable inference is that the accountant concluded that Henderson-Briehl was wrongly decided”, as per Arbitrator Rogers’ decision, dated November 14, 2007.

In the course of rendering his order for the “Special Award”, Arbitrator Rogers again chastised Dominion’s subsequent action vis-à-vis Ms. Lisowecki’s email as “imprudent”. Simply put, he stated that “Dominion compounded its error when it stubbornly refused to change its position after Ms. Lisowecki brought the decision in Henderson-Briehl to its attention. Because the decision in Henderson-Briehl does not bind other decision makers, Dominion might have been able to justify its conduct, had it relied on the legal opinion of someone qualified to give one. Instead, it sought and it accepted the legal opinion of an accountant to the effect that Henderson-Briehl was wrongly decided”.

Another of the many issues in this matter was the confusion around the proper treatment of Ms. Lisowecki’s special EI benefits. Although the accountant had characterized these benefits as EI benefits, separate and apart from Ms. Lisowecki’s revenues and expenses of self-employment, Dominion contradicted their own accountant’s position in this regard and supported both Ms. Lisowecki’s position and the arbitrator’s initial finding, within the auspices of the Henderson-Briehl decision, that her special EI benefits should be reduced by her losses from self-employment and thereby reduce her IRB. Arbitrator Rogers believes that “The minimum requirement of good faith was for Dominion to bring the approach of PriceWaterhouse [their accountant] to Ms. Lisowecki’s attention, despite her own initial position. Instead, Dominion maintained a position contrary to the approach PriceWaterhouse had taken, and never brought it to Ms. Lisowecki’s attention”. The foregoing comment is particularly appropriate in the circumstances in view of Dominion’s failure to depart from, or confirm with legal counsel, their accountant’s position regarding the application of the outcome of the Henderson-Briehl decision in general.

“Special Awards” are made when “an insurer has unreasonably withheld or delayed payments”, which was clearly the case with respect to AXA’s IRB payments to Mr. Johnston and Dominion’s IRB payments to Ms. Lisowecki. Further, these matters serve to highlight the added complexity associated with adjusting IRBs for a self-employed claimant. If a claimant’s business has continued to operate following the accident, one rule-of-thumb is to review the calculation of the IRB every three months or so to avoid creating a sizeable overpayment or underpayment. Revenues that suffer immediately following an accident may rebound by virtue of a claimant recovering from their injuries, organizing their existing staff for their absence due to the accident and/or hiring replacement workers. As a result, a business that was breaking even or losing money immediately following the accident could begin to generate post-accident income from self-employment, which may be deductible in the calculation of the claimant’s IRB, pursuant to subsection 6(2) of the SABS.

Conversely, the aftermath of a motor vehicle accident may prove to be harder and harder on a business with the passage of time. A claimant who had once been earning post-accident income from their self-employment, deducted in the calculation of their IRB, may start incurring losses from their self-employment as a result of the accident, which should be included in the calculation of their IRB, pursuant to subsection 6(5) of the SABS.

However, post-accident losses from self-employment, whether they come into being at the outset of a claim or as a claim progresses, should not persist indefinitely. In the case of an unincorporated business, it is important to review its status after the end of the first fiscal year following the accident, as the IRB may decrease at that time to account for a reduction in the ongoing expenses of the business. In addition, subsection 6(5) of the SABS requires that losses included in the quantification of the IRB must be “incurred as a result of the accident”, not due to factors unrelated to the accident such as the economy or poor business decisions, also at issue in the Johnston decision.

It would be an unusual circumstance whereby a claimant is entitled to an indefinite claim for post-accident losses from self-employment incurred as a result of an accident. As a result, when you are adjusting the claim of a self-employed person it is important for you and your accountant to keep in regular contact (every 3 to 6 months) with the self-employed claimant in this regard. Equally important is that you closely monitor the jurisprudence as it pertains to the SABS and the quantification of IRBs. Ignorance to what either the claimant or an advisor, such as an accountant, is telling you in terms of an interpretation of the SABS is inexcusable from an arbitrator’s perspective. If what you are hearing or reading in an accountant’s report is at odds with your knowledge of the subject, maintain an open mind and vet the issue with your colleagues, your accountant, another accountant and/or inside or outside legal counsel. By doing your own due diligence you may avoid facing an order for a “Special Award”.

First published in Without Prejudice magazine, OIAA, Volume 73, Number 1, September, 2008.

A Partner at H&A Forensic Accounting Inc. (www.HAForensics.com), Janet L. Olsen, CA, CFE, is a forensic accounting specialist who has performed hundreds of complex financial investigations focusing on accident benefit claims and economic losses. Her expertise is also reflected in technical and second opinion client reports to guarantee the highest standards of quality and integrity. Tel: 866.233.5577 or e-mail jolsen@HAForensics.com

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