ACCIDENT BENEFITS - THIS YEAR S TOP CASES IN REVIEW

ACCIDENT BENEFITS - THIS YEAR S TOP CASES IN REVIEW THE 7 TH ANNUAL ADVOCACY CONFERENCE Presented by: THE HAMILTON LAW ASSOCIATION Prepared by: A. Jarvis Scott Hughes, Amys LLP One King Street West Suite 1401 Hamilton, Ontario L8P 1A4 INTRODUCTION Phone: (905) 577-4050 jscott@hughesamys.com

THE STATUTORY ACCIDENT BENEFITS SCHEDULE - Accidents on or after November 1, 1996, O. Reg. 403/96, has now been in place for over 10 years. In the Fall of 2003, the writer was involved in preparing a paper reviewing the Top Ten Statutory Accident Benefits Cases for 2003. At that time, an election was underway in Ontario. New regulations were being written and passed on what seemed to be a weekly basis. There were significant changes to both the tort system and the Statutory Accident Benefits Schedule. In 2006, there was another significant revamping of the Statutory Accident Benefits Schedule, with the elimination of the DAC system. Despite the revisions in 2003 and in 2006, Ontario lawyers have been blessed by a relatively stable set of rules and regulations governing Statutory Accident Benefits. The current Schedule has been in place, by and large since 1996. In the early 90's, Governments of the day implemented and revoked what are known as the OMPP and Bill 164 SABS, between 1990 and 1996. These earlier Statutory Accident Benefit schemes were complex and introduced concepts that were novel and ripe for litigation. With the passage of time, lawyers doing work in the Statutory Accident Benefits field are feeling somewhat less stressed having to deal primarily with only one, rather than three, different Statutory Accident Benefits Schedules. Interestingly, the majority of the material and significant new cases that we have identified in this review are not a function of any of the recent changes made to the current Statutory Accident Benefits Schedule, but rather reflects significant developments with respect to provisions that have been in place since November 1996. Several long held beliefs or assumptions as to what the law was have turned out to be wrong, according to our Court of Appeal. It is remarkable that it took ten years to have the Court of Appeal rule on these issues (or that we all could have been so wrong!). As always, new facts and circumstances, the creativity of the plaintiff s bar and, to some extent, changes in judicial attitude, guarantee that new law will continue to be created and that annual reviews will continue into the future. In this paper, we have attempted to identify what we believe to be the most significant cases, in the Statutory Accident Benefits context in the past year.

1. CATASTROPHIC IMPAIRMENT - MAYBE IT S NOT SO HARD TO GET THERE AFTER ALL The catastrophic impairment provisions of the Ontario Statutory Accident Benefits scheme are complex and intricate. There is a developing body of case law interpreting the catastrophic impairment provisions of the Statutory Accident Benefits Schedule. Several of these cases were decided in the past year or so. They are difficult to summarize and synthesize. Readers are encouraged to take the time to review the decisions discussed below in their entirety. The definition of catastrophic impairment is found in Section 2(1.1) (prior to October 1, 2003) and Section 2(1.2) (after October 1, 2003) of the Statutory Accident Benefits Schedule. It provides as follows: (1.1) For the purposes of this Regulation, a catastrophic impairment caused by an accident that occurs before October 1, 2003 is: (a) paraplegia or quadriplegia; (b) the amputation or other impairment causing the total and permanent loss of use of both arms; (c) the amputation or other impairment causing the total and permanent loss of use of both an arm and a leg; (d) the total loss of vision in both eyes; (e) brain impairment that, in respect of an accident, results in: (i) a score of 9 or less on the Glasgow Coma Scale, as published in Jennett, B. and Teasdale, G., Management of Head Injuries, Contemporary Neurology Series, Volume 20, F.A. Davis Company, Philadelphia, 1981, according to a test administered within a reasonable period of time after the accident by a person trained for that purpose, or (ii) a score of 2 (vegetative) or 3 (severe disability) on the Glasgow Outcome Scale, as published in Jennett, B. and Bond, M., Assessment of Outcome After Severe Brain Damage, Lancet i:480, 1975, according to a test administered more than six months after the accident by a person trained for that purpose;

(f) subject to subsections (2) and (3), an impairment or combination of impairments that, in accordance with the American Medical Association s Guides to the Evaluation of Permanent Impairment, 4th edition, 1993, results in 55 per cent or more impairment of the whole person; or (g) subject to subsections (2) and (3), an impairment that, in accordance with the American Medical Association s Guides to the Evaluation of Permanent Impairment, 4th edition, 1993, results in a class 4 impairment (marked impairment) or class 5 impairment (extreme impairment) due to mental or behavioural disorder. O. Reg. 281/03, s. 1 (5); O. Reg. 314/05, s. 1 (1, 2). (1.2) For the purposes of this Regulation, a catastrophic impairment caused by an accident that occurs after September 30, 2003 is: (a) paraplegia or quadriplegia; (b) the amputation or other impairment causing the total and permanent loss of use of both arms or both legs; (c) the amputation or other impairment causing the total and permanent loss of use of one or both arms and one or both legs; (d) the total loss of vision in both eyes; (e) subject to subsection (1.4), brain impairment that, in respect of an accident, results in: (i) a score of 9 or less on the Glasgow Coma Scale, as published in Jennett, B. and Teasdale, G., Management of Head Injuries, Contemporary Neurology Series, Volume 20, F.A. Davis Company, Philadelphia, 1981, according to a test administered within a reasonable period of time after the accident by a person trained for that purpose, or (ii) a score of 2 (vegetative) or 3 (severe disability) on the Glasgow Outcome Scale, as published in Jennett, B. and Bond, M., Assessment of Outcome After Severe Brain Damage, Lancet i:480, 1975, according to a test administered more than six months after the accident by a person trained for that purpose; (f) subject to subsections (1.4), (2.1) and (3), an impairment or combination of impairments that, in accordance with the American Medical Association s Guides to the Evaluation of Permanent Impairment, 4th edition, 1993, results in 55 per cent or more impairment of the whole person; or (g) subject to subsections (1.4), (2.1) and (3), an impairment that, in accordance with the American Medical Association s Guides to the Evaluation of Permanent Impairment, 4th edition, 1993, results in a class 4 impairment (marked impairment)

or class 5 impairment (extreme impairment) due to mental or behavioural disorder. O. Reg. 281/03, s.1 (5). (1.3) Subsection (1.4) applies if an insured person is under the age of 16 years at the time of the accident and none of the Glasgow Coma Scale, the Glasgow Outcome Scale or the American Medical Association s Guides to the Evaluation of Permanent Impairment, 4th edition, 1993, referred to in clause (1.2) (e), (f) or (g) can be applied by reason of the age of the insured person. O. Reg. 281/03, s. 1 (5). (1.4) For the purposes of clauses (1.2) (e), (f) and (g), an impairment sustained in an accident by an insured person described in subsection (1.3) that can reasonably be believed to be a catastrophic impairment shall be deemed to be the impairment that is most analogous to the impairment referred to in clause (1.2) (e), (f) or (g), after taking into consideration the developmental implications of the impairment. O. Reg. 281/03, s. 1 (5). (2) Clauses (1.1) (f) and (g) do not apply in respect of an insured person who sustains an impairment as a result of an accident that occurs before October 1, 2003 unless, (a) the insured person s health practitioner states in writing that the insured person s condition has stabilized and is not likely to improve with treatment; or (b) three years have elapsed since the accident. O. Reg. 403/96, s. 2 (2); O. Reg. 281/03, s. 1 (6). (2.1) Clauses (1.2) (f) and (g) do not apply in respect of an insured person who sustains an impairment as a result of an accident that occurs after September 30, 2003 unless, (a) the insured person s health practitioner states in writing that the insured person s condition is unlikely to cease to be a catastrophic impairment; or (b) two years have elapsed since the accident. O. Reg. 281/03, s. 1 (7). (3) For the purpose of clauses (1.1) (f) and (g) and (1.2) (f) and (g), an impairment that is sustained by an insured person but is not listed in the American Medical Association s Guides to the Evaluation of Permanent Impairment, 4th edition, 1993 shall be deemed to be the impairment that is listed in that document and that is most analogous to the impairment sustained by the insured person. O. Reg. 403/96, s. 2 (3); O. Reg. 281/03, s. 1 (8). The differences between the definitions pre-and-post September 30, 2003, are not material to the discussion in this paper.

The provisions of both definitions that have given rise to the most litigation, in the past year, are those found in Sections 1.1 and 1.2 (f) and (g). The criteria set out in subparagraphs (f) and (g) have been in the Statutory Accident Benefits Schedule since November 1996. In our experience, there seemed to be very little attention paid to subparagraph (g), marked or extreme mental or behavioural disorder, until recently. Given the recent case law, subparagraph (g) may be the area of greatest concern for insurers going forward. The leading decision in the interpretation of catastrophic impairment is Desbiens et al v. Mordini et al, [2004] O.J. No.4735 (Ont.S.C.J.), a decision of Mr. Justice Spiegel, released on November 17, 2004. Mr. Desbiens was rendered a paraplegic due to an injury to his spinal column in 1986. In November 1999, while operating his wheelchair on a sidewalk, he was struck by the defendant, Mordini. He claimed that as a result of the injuries sustained in the accident, he had sustained a catastrophic impairment, as defined for tort purposes, under Section 267.5 of The Insurance Act. The definition of catastrophic impairment in Section 267.5 mirrors the definition in the Statutory Accident Benefits Schedule. He claimed that he met the definition under Section (f) and (g). The injuries sustained in the accident included a spiral fracture of the right femur and severe constant daily headaches. There were complaints of memory and other neurological difficulties. He had developed pain in his neck, shoulders and elbow. There were reports of hip pain. The evidence at trial showed a significant interference with hobbies and activities which he was able to undertake, despite being a paraplegic.

Mr. Justice Spiegel undertook an in depth review of the principles, workings and philosophy of the American Evaluation of Permanent Impairment, 4 th edition, 1993. For anyone doing tort and Statutory Accident Benefits work, a review of the Judgment is mandatory reading. The two doctors who attempted to quantify the whole person impairment, for the purposes of subparagraph (f) rating, faced an interesting challenge in light of the pre-existing paraplegia. The Judgment stated that both the plaintiff s assessor and the defence s assessor recognized the need to take an approach that would permit an assessor to adequately capture the impact of Mr. Desbiens impairments superimposed upon his pre-existing paraplegia. Essentially, the plaintiff s doctor assessed the physical impairments such that the impairments exceeded the 55% whole person impairment. The defence doctor arrived at a 40% whole person physical impairment. The Judge found that there was impairment in accordance with subparagraph (f). The initial finding of the Court was that Mr. Desbiens had sustained a catastrophic impairment. This finding was made without regard to any psychological impairment. The Court went on, in the event that the finding on physically based impairment was in error, to consider the following question: On a proper interpretation of the Regulation, is it in accordance with the Guides to assign percentage ratings to Mr. Desbiens psychological impairments and combine them with his physical impairments, for the purpose of determining whether his impairments meet the definition of catastrophic as defined by clause (f)?. The answer was that you could. This was contrary to the way assessments were being conducted by DACs and to the belief of most doctors and lawyers working in the system. The Court concluded that if the plaintiff s doctor s evidence that the physically based whole person impairment in excess of 55% was inaccurate, then combining the defence doctor s whole person

impairment of 40%, with the psychological impairment, resulted in a whole person impairment of 55%. The Desbiens decision also involved a discussion of subparagraph (g) which has been followed in recent cases (discussed below). It appears that the Desbiens decision educated quite a few members of the plaintiff s bar. It is my perception that applications for catastrophic impairment have increased since its release. In 2006, a number of decisions were released by the Financial Services Commission of Ontario with respect to the issue of catastrophic impairment. One of the more anticipated decisions was the Appeal decision of the Director s Delegate, Nancy Makepeace, in Belair Insurance Company Inc. and David McMichael, (F.S.C.O. Appeal P05-00006), March 14, 2006. David McMichael was injured in a motor vehicle accident on June 14, 1998. Mr. McMichael was claiming attendant care beyond 104 weeks and by implication, was obliged to establish that he had suffered a catastrophic impairment as defined in Section 2(1.1) of the SABS. The critical issue in the case was whether or not there was a causal relationship between the car accident and current psychological addiction difficulties, and in particular, an addiction to crack cocaine. Essentially, Mr. McMichael alleged that as a result of the accident, he had become a crack cocaine addict. As a result of his crack cocaine addiction, combined with some chronic pain complaints and other emotional and behavioural cognitive issues, he alleged that he was catastrophically impaired under (f) and (g) of the definition. The arbitrator accepted, despite evidence of pre-existing use, that Mr. McMichael s drug addiction was as a direct consequence of the accident. A CAT DAC assessment had concluded that Mr. McMichael s impairments did not meet the criteria for either paragraph (f) or (g).

The American Medical Association s Guides to the Evaluation of Permanent Impairment (the Guides ) established a classification table for the assessment of psychological disorders. In essence, there are four areas of function that are to be assessed. The classification table is reproduced below: Area or Aspect of Functioning Class 1: No impairment Class 2: Mild impairment Class 3: Moderate impairment Class 4: Marked impairment Class 5: Extreme impairment Activities of daily living No impairment is noted Impairment levels are compatible with most useful functioning Impairment levels are compatible with some, but not all, useful functioning Impairment levels significantly impede useful functioning Impairment levels preclude useful functioning Social Functioning Concentration Adaption Several issues arise: 1. Is marked impairment in one of the four areas sufficient to meet the test for catastrophic impairment? 2. How subjective is a designation that tries to distinguish between moderate impairment and marked impairment? In the initial arbitration decision in McMichael, the arbitrator concluded that the DAC assessors had not gathered useful information about Mr. McMichael s level of functioning. Had they done so, it might have resulted in a more favourably score when the evidence, taken as a whole, was considered. The DAC failed to incorporate much of the collateral evidence of family members and others. The arbitrator referred to the Guides criteria for the Assessment of Severity by areas of function for subparagraph (g) issues, as follows: Assessment of Severity Describe in detail the severity of limitations imposed by the disorder...

1. Activities of daily living, including adaptive activities, such as cleaning, shopping, cooking, taking public transportation, paying bills, maintaining a residence, caring for self, grooming, using the telephone and directory, using the post office and working. 2. Social functioning and ability to get along with others, including family members, friends, neighbours, grocery clerks, landlords, and others of the public. Social functioning in work situations may involve responding appropriately to persons in authority and co-operative behaviour towards co-workers. 3. Concentration, persistence, and pace (task completion); this refers to the patient s ability to sustain focused attention long enough to permit the completion of everyday tasks in the workplace or home. Describe deficiencies in concentration, persistence, and pace that have been observed at work or in the work-like settings. Include relevant information from the mental status examination and from psychological testing. 4. Deterioration or decompensation in work-like settings; describe failures to adapt to stressful circumstances that cause the individual either to withdraw from the situation or to experience signs and symptoms and difficulties with activities of daily living, social relationships, concentration, persistence, and pace. Describe any decompensation at work, which might involve decisions, attendance, schedules, completing tasks, interactions with supervisors, and interactions with peers. The Guides describe this fourth area of assessment as follows: Deterioration or decompensation in work or work-like settings refers to repeated failure to adapt to stressful circumstances. In the face of such circumstances, the individual may withdraw from the situation or experience exacerbation of signs and symptoms of a mental disorder, that is, decompensate and have difficulty maintaining activities of daily living, continuing social relationships, and completing tasks. Stresses common to the work environment include attendance, making decisions, scheduling, completing tasks, and interacting with supervisors and peers... In McMichael, the arbitrator found that Mr. McMichael had scored a Class 4, marked psychological impairment, in 3 of the 4 areas of the assessment. He also found that even if only assessed in one area as marked, he would have met the definition of catastrophic impairment in accordance with subparagraph (g) of Section 2(1.1).

With respect to subparagraph (f), the arbitrator found that Mr. Michael did NOT have 55% whole body impairment, based solely on physical impairment. The CAT DAC had found 31% whole body impairment, based on the physical impairments as assessed. Mr. McMichael submitted that if his psychological impairments were added to the physical impairments, in accordance with Desbiens, he would meet the test under subparagraph (f). It was a matter of converting the psychological results into a percentage score for the purpose of the whole person impairment calculation. Belair argued that in Desbiens, the Court had opinion evidence of a doctor as to the proper percentage to apply. This had not been done by Mr. McMichael at the arbitration. Ultimately, while agreeing that the psychological impairment could be added to the physical impairments, the arbitrator declined to do so based on the evidence in the case. The Appeal decision of the Director s Delegate, Ms. Makepeace, confirmed the original arbitration decision. Accordingly, there was no finding under subparagraph (f). The Director s Delegate upheld the arbitrator s finding that a Class 4 or 5 impairment was required in only one functional area to meet the test under subparagraph (g). Belair had appealed, on the basis that the finding of impairment under subparagraph (g) and a finding of no catastrophic impairment under subparagraph (f) were irreconcilable. The Director s Delegate simply rejected this argument out of hand, stating that the catastrophic impairment ratings are clearly alternatives. The Director s Delegate agreed with Justice Spiegel s comment in Desbiens that the statutory direction that an impairment be evaluated in accordance with the AMA Guides should be given a fair, large and liberal interpretation so as to ensure the attainment of the object of the act according to its true intent, meaning and spirit. The Director s Delegate specifically approved Justice Spiegel s conclusion in Desbiens that impairments due to mental or behavioural disorders described in subparagraph (g) could be assigned

a percentage and combined with other impairments in the assessment of whole body impairment under subparagraph (f). The Desbiens decision was reached after the closing of evidence in McMichael and the Director s Delegate noted that the arbitrator limited himself to a discussion of the issue without making a finding on the combined rating. The remainder of the Director s Delegate decision deals with the issue of causation vis-a-vis drug abuse, addiction and a motor vehicle accident. In Ms. G and Pilot Insurance Company, (F.S.C.O. A04-000446), March 16, 2006, Arbitrator Lawrence Blackman dealt with the issue as to whether or not Ms. G sustained a catastrophic impairment as defined by paragraphs 2(1)(f) or 2(1)(g) of the then applicable Schedule. He found that she had sustained a catastrophic impairment as defined by subparagraph (f) and had not suffered a catastrophic impairment as defined by subparagraph (g). This decision is of interest given the comments of Arbitrator Blackman under the heading General Principles found at pages 3, 4 and 5 of the decision. He points out that the Guides do not cover all conditions arising out of injuries. He refers to the fact, as have several Judges, that the Guides themselves caution as to their reliability for interpreting disability and strongly discourage the use of any Guides but the most recent edition. The Guides referred to in the Statutory Accident Benefits Schedule are over a decade old and have been replaced by further editions. The Schedule mandates adherence to an outdated 4 th edition. Paragraph 2(1)(3) provides that an impairment that is sustained by an insured person but not listed in the Guides, shall be deemed to be the impairment that is listed in that document that is most analogous to the impairments sustained by the insured person. Arbitrator Blackman stated that the approach of the Schedule is that ultimately, the determination of a catastrophic impairment is an adjudicative determination, rather than a medical determination. The trier of fact is not simply reduced to choosing between expert medical opinions. He stated:

In addition, it is important to be cognizant that the Guides are not intended to reduce human beings to a collection of bones, nerves, flesh and sinew. Body parts do not have impairments. People have impairments. Arbitrator Blackman s decision is also informative for a comment on the expert evidence that he received. At page 13 of the decision, he stated: Before proceeding, I wish to acknowledge and thank both Dr. Ameis and Dr. Becker for their most helpful evidence and their tremendous expertise in this complicated area of CAT DAC assessment. Their somewhat different philosophical approaches helped to better illuminate some of the shortfalls of the Guides as a less than perfect scientific tool. However, one s enthusiasm for a topic may, on occasion, cloud the sometimes difficult line between neutrality and advocacy. Arbitrator Blackman rejected arguments that the psychological impairment should not be included in the whole person impairment ratings, and followed Desbiens and McMichael. Ultimately, after an extensive and complex review of the impairment ratings in accordance with the Guides, Arbitrator Blackman found the 55% whole body impairment but did not find impairment under subparagraph (g). In Rozana Lee, By Her Guardian of Property, Wai Ching Lee and State Farm Automobile Insurance Company, (F.S.C.O. A03-000181), February 3, 2006, Arbitrator Denise Ashby found that the plaintiff had sustained a catastrophic impairment under Section 2(1)(g) of the Schedule. Ms. Lee had been involved in an accident on August 21, 2000. She was a passenger in a vehicle travelling at approximately 20 kms. to 30 kms. per hour when it struck a car ahead. The issue in this case is one of causation. Ms. Lee had a pre-existing, long standing passive dependent personality style. There was evidence of pre-existing dependence or abuse of narcotic medications.

The arbitrator concluded that despite these pre-existing problems, the issue was whether or not the accident significantly or materially contributed to her post-accident impairment. There were an array of diagnoses vis-a-vis Ms. Lee. There was universal agreement that she had regressed to a childlike state. The arbitrator found on the totality of the evidence, that the regression was caused by the accident. Numerous medical examiners found Class 4 and 5 impairments and the arbitrator concluded that Ms. Lee had developed a mental or behavioural disorder in accordance with Section 2(1.1)(g) of the Schedule and that she was catastrophically impaired. In B.P. and Primmum Insurance Co., (F.S.C.O. A05-001608), December 21, 2006, Arbitrator Blackman found that the insured had sustained a catastrophic impairment within the meaning of paragraph 2(1)(f) of the Schedule. The accident in issue occurred on May 10, 2002. The insurer argued that changes made to the Schedule after 2003 applied to this case. The insured had not applied for a catastrophic impairment designation until after the legislative changes. Arbitrator Blackman concluded that the definition of catastrophic impairment in place at the time of the accident was applicable. He referred to earlier decisions which have held that the common law rule of construction is that legislation is presumed only to apply prospectively. It is not to be construed as having retrospective or retroactive operation unless such a construction is expressly, or by necessary implication, required by its language. Legislation should not be applied in circumstances where its application would interfere with vested rights. B.P. was 22 years of age when his leg was severed in a motorcycle accident. His position was that his whole person impairment was 71% to 73%. Primmum submitted that it was a 44% whole person impairment. Arbitrator Blackman again referred to the Guides and the fact that they themselves indicate that they cannot provide answers about every type and degree of impairment in part because the field of

medicine and medical practice is characterized by constant change in understanding disease and its manifestations, diagnosis, and treatment. He continued: That the Guides is not exhaustive is confirmed by subsection 2(3) of the Schedule, which provides that if an impairment is not listed in the Guides, then the impairment shall be deemed to be the impairment most analogous to the impairment sustained by the insured person. In this case, the arbitrator found a 20% whole person impairment relating to skin issues arising as a result of the amputation. There was expert evidence that a moderate impairment of mental and behavioural assessment resulted in limited social and recreational activities. An expert psychiatrist gave evidence of a whole person impairment of 20% to 25%. This evidence was rejected. The arbitrator accepted the CAT DAC psychiatric assessment under subparagraph (g) which found mild impairments in activities of daily living, social functioning, concentration, persistent and pace. With respect to adaptation to work or workplace settings, there was no impairment. The arbitrator found, based on other evidence, that the CAT DAC assessors rating for adaptation ought to be indicated at mild. The CAT DAC 44% whole person impairment did not include any rating for mental and behavioural disorders under chapter 14 of the Guides. Dr. Becker gave evidence that there were psychiatric and emotional issues and that a rating for mental and behavioural impairment should be added to the WPI. Arbitrator Blackman agreed. Arbitrator Blackman ultimately determined that 15% was an appropriate impairment rating for the mental condition, and therefore, on a combined basis, he sustained catastrophic injury. 2. AGGRAVATED DAMAGES: YOU DON T NEED A SEPARATE ACTIONABLE WRONG AFTER ALL On June 29, 2006, the Supreme Court of Canada released its decision in Fidler v. Sun Life Assurance Co. of Canada, [2006] S.C.J. No.30.

In Fidler, the plaintiff received Long Term Disability Benefits from Sun Life Assurance, through her employer. At the age of 36, she began to receive Long Term Disability Benefits. She suffered from chronic fatigue syndrome and fibromyalgia. The test for ongoing entitlement changed at the two year mark. She was only entitled to benefits if she was unable to do any job for which she was reasonably suited by reason of training, education or experience. One week prior to trial, the insurer reinstated benefits and paid arrears. The only issue at trial related to aggravated and punitive damages for bad faith. The trial Judge awarded aggravated damages in the sum of $20,000.00 given that the contract was one of peace of mind. The trial Judge found that the insurer s conduct did not constitute bad faith so as to warrant punitive damages. The British Columbia Court of Appeal upheld the award of aggravated damages, and reversed the finding on bad faith. The Court of Appeal found that the conduct of the insurer did constitute bad faith, which required denunciation and deterrence. The Court of Appeal awarded $100,000.00 in punitive damages finding a palpable and overriding error on the question of bad faith. The head note of the Supreme Court decision reads as follows: Damages for mental distress for breach of contract may be recovered where they are established on the evidence and shown to have been within a reasonable contemplation of the parties at the time the contract was made. There is no requirement for an independent actionable wrong. In order to be successful, a plaintiff must prove his or her loss and the Court must be satisfied that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. These questions require sensitivity to the particular facts of each case. Here, given the nature of a disability insurance contract, it would have been within the reasonable contemplation of the parties at the time the contract was made, that mental distress would likely flow from a failure to pay the required benefits. An unwarranted delay in receiving the bargained for protection can be extremely stressful. The mental distress at issue here was of a degree sufficient to warrant compensation... The Court of Appeal s award of punitive damages must be set aside. Punitive damages are not compensatory. They are designed to address the purposes of retribution, deterrence and denunciation. However, an insurer will not necessarily be liable for such damages by incorrectly denying a claim that is eventually conceded, or judicially determined, to be legitimate. The question in each case is whether the denial was the result of the overwhelmingly inadequate handling of the claim, or the introduction of improper considerations into the claims process. Ultimately, each case revolves around its own facts. Here, after a thorough review of the relevant

evidence, the trial Judge found that the insurer had not acted in bad faith. He considered every salient aspect of how the insurer handled the claim and concluded that its denial of benefits was the product of real, albeit incorrect, doubt as to whether F was incapable of performing any work. The termination of benefits relating to an unobservable disability in the absence of any medical evidence indicating an ability to return to work, represents conduct that is troubling, but not sufficiently so as to justify interfering with the trial Judge s conclusion that there was no bad faith. In the reasons, the Court once again stated that to attract punitive damages, the impugned conduct must depart markedly from ordinary standards of decency the exceptional case that can be described as malicious, oppressive or high handed in that it offends the Court s sense of decency. Certainly, it can be argued that Statutory Accident Benefits are based on a peace of mind contract of insurance and that in the proper case, aggravated damages should be awarded. Entitlement to aggravated damages should be easier to establish than punitive damages, given the rather significant level of poor conduct required to attract a punitive damage award. In P.K.R. v. Unum Life Insurance Company of America, 2006 CanLII 41293 (ON. S.C.), a decision of Mr. Justice Polowin dated December 11, 2006, the Court provided an addendum to an initial set of reasons delivered on May 12, 2006. The decision was rendered in light of the Supreme Court s reasons in Fidler. The plaintiff had amended his claim at trial to claim $500,000.00 for punitive damages and $100,000.00 for aggravated damages. At the time of the initial reasons, the Judge had concluded that to obtain aggravated damages, the plaintiff needed to establish a separate actionable wrong. When Fidler was released, no formal Order or Judgment had been entered in the P.K.R. file. The plaintiff sought a variation on the decision given the change in the law for mental distress and aggravated damages as the result of the Supreme Court s decision. The plaintiff again sought to amend the Statement of Claim to allege more significant damages for aggravated and punitive damages. The defendant submitted that the Fidler case held that a plaintiff need not establish a separate independent actionable wrong to be entitled to an award for mental distress damages in a breach of contract case if they could meet a two part test:

(a) (b) That the object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and That the degree of mental suffering caused by the breach was a degree sufficient to warrant compensation. The defendant submitted that the plaintiff bears the burden of providing these two branches of the test, and that the evidence did not do so in this case. The plaintiff s amendment in the sum of $600,000.00 was for more than simply aggravated damages. The aggravated damages claim was for the sum of $100,000.00. The plaintiff sought $600,000.00 for consequential damages including damages for mental distress, damages relating to the sale of a home, and damages related to the reduction of an investment portfolio. The Court accepted the defence position that had it been aware of the potential exposure, it would have conducted the defence differently. There might have been a need for expert evidence on a number of issues. The Court noted that damages for consequential loss are separate and distinct from damages for mental distress. The amendment was not allowed. The damages for mental distress were assessed at $30,000.00. 3. THE COURT OF APPEAL STUMPS THE EXPERTS - INSURERS CAN T SUE INSUREDS FOR DECLARATORY RELIEF AFTER ALL In Liberty Mutual v. Fernandes, [2006], O.J. No. 3514 (C.A.), the Court of Appeal held that an insurer does not have the right to bring an action for a declaration that an insured has not suffered a catastrophic impairment following a CAT DAC which deems the insured catastrophic. In coming to this conclusion, the Court put to rest two commonly held perceptions regarding CAT DACs: 1. That the insurer did indeed have this right to seek a declaration; and

2. That the CAT DAC is binding upon the insurer in that they are required to pay the benefits based upon the finding of the CAT DAC, and subject to other issues of entitlement and quantum, until the final determination of the dispute. Now, neither statement can be taken as correct. Historically, Arbitrators at the Financial Services Commission have accepted that the insurer only has a common law right to commence an action, but not the right to commence an arbitration. This was widely perceived to be the law, although recently, cases such as Travellers Casualty and Surety Co. of Canada v. Scanlan and the trial decision in Fernandes had brought this into question. The Court of Appeal held that ss. 279-282 of The Insurance Act constitute a complete code for the determination of entitlement and quantum, and that the insurer has no right of action under the Act. Pursuant to Section 40(4) of the SABS, the finding of the CAT DAC is binding on the insurer subject to the determination of a dispute in accordance with s.279 to 283. The insurer may commence a mediation, but may not bring action and must allow the insured to select the forum in which the dispute will be resolved. The onus is on the insured to follow through with the dispute resolution process after a failed mediation in order to obtain the benefits he or she would be entitled to as a result of the contested CAT DAC. The insurer is only required to pay in accordance with its last offer at mediation. The Court stated: The practical effect of s. 281(3) of the Act, read in conjunction with s. 40(4) of the SABS, is that although the CAT DAC finding is binding on both parties, if the insurer seeks mediation pursuant s. 280 of the Act and the mediation fails, the insurer need only pay benefits in accordance with the last offer of settlement it made before the failed mediation, until the parties agree or until a Court, an arbitrator, or Director on appeal from the arbitrator under the Act, orders otherwise. Consequently, the onus is always on the insured to initiate dispute resolution after a failed mediation in order to seek any additional benefits that may be warranted by the CAT DAC. If the insured does not act, the insurer will only pay benefits in the amount at which is was prepared to settle. The insurer is thereby protected and need not pay the additional benefits to which it objects unless so ordered through the

dispute resolution scheme. The insured is similarly protected as it has the right, pursuant to s. 281(1), to commence litigation or arbitration to try to obtain the benefit of a favourable CAT DAC finding. By leaving the choice of forum always with the insured, the legislature has guaranteed that the insured maintains control of the process including its timing and cost. See Baron v. Kingsway General Insurance Co. (2006), 35 C.C.L.I. (4 th ) 180 (Sup. Ct.) at para. 29. Arbitration under the Act is an expeditious and much less costly process than a Court action, but the Court option is open to an insured. At the same time, s. 281(5) (now s. 281.1), protects the insurer from any undue delay by the insured in initiating dispute resolution, by providing a two year limitation (subject to the SABS) following an insurer s refusal to pay a claimed benefit, for a step to be taken under s. 281(1). The result is that when s. 281 is read in its entirety, it is evident that the insurer is not left without a remedy when it wishes to dispute the finding of the CAT DAC. It is given a remedy by the operation of the provisions: if an insurer wishes to dispute a CAT DAC finding, it can commence mediation. If mediation has been tried and failed the insurer can revert to paying only what it was willing to settle for until there is an agreement or an order directing a different amount. As a result, an insured cannot, in effect, allow the mediation to fail, then claim that the CAT DAC finding is binding on the insurer and take no further action. Rather, the insured would be obliged to use its right in to seek to obtain the higher benefits that are available to a person with a catastrophic impairment. The Court of Appeal also noted that insurers should not view s.281(3) and (4) as an invitation to make an unreasonably low offer to settle at mediation, in order to pay only that amount until the dispute is resolved. In Samoila v. Prudential of America General Insurance Co., [1999] O.J. No. 2317, the insurer made an offer of zero, and the Court on a motion exercised its power to grant a higher amount. The Court of Appeal decision in Fernandes follows two recent cases on similar issues. In Baron v. Kingsway General Insurance (2006), 80 O.R. (3d) 290, Justice Pardu, while dealing with a motion for independent medical examinations, held that an insurer does have the ability to contest a CAT DAC finding, but that this must be in the forum selected by the insured. Justice Pardu comments that the insurer is generally required to continue payments until the issue is finally resolved. It does not appear that this is the case, and the Court of Appeal states quite clearly that the insurer is only required to pay in accordance with its last offer made at mediation. This ought

to be similar for any pay pending dispute benefit as all contain similar wording to the effect that the insurer may dispute the obligation to pay the benefit in accordance with ss.270-283 of The Insurance Act, and pending the resolution of the dispute, the insurer shall pay the benefit. In Royal and Sun Alliance v. Di Pietro, [2005] O.J. No. 6054, the insurer sought an injunction restraining itself from paying income replacement benefits in accordance with a DAC. Justice N.J. Spies held that an injunction was not available under the circumstances. Justice Spies made the following comment, perhaps in obiter: Unlike the insured, however, the plaintiff does not have recourse to binding arbitration and its only remedy is to commence action. In the meantime, the insurer is statutorily obligated to continue to make the payments to the defendant notwithstanding that it takes issue with the DAC ruling. This case is noted in a footnote in the Fernandes decision and on these two points ought to be considered overruled. 4. WAD I or WAD II - SECTION 5 (2) OF THE SCHEDULE - Kieffer and Economical Mutual Insurance Company, (F.S.C.O. A05-000494) With the enactment of Bill 198, the Statutory Accident Benefits Schedule incorporated a classification system first enunciated by a Quebec task force dealing with whiplash associated disorders. This classification scheme refers to WAD I and WAD II. Where there is a diagnosis of WAD I or WAD II, protocols are prescribed for scope and duration of rehabilitation, and for accidents which occur after April 14, 2004, income replacement benefits are paid on a limited basis. Section 5(2) of the Schedule provides that income replacement benefits shall not be paid for longer than 12 weeks after the accident in the case of a WAD I injury, or 16 weeks in the case of a WAD II injury. The criteria with respect to what constitutes a Grade I whiplash or a Grade II whiplash are set out in the pre-approved framework guidelines published by the Financial Services Commission of Ontario.

In Kieffer, the insured was paid 16 weeks of benefits. The benefits were terminated on the basis that she had suffered a WAD II injury. Under the guidelines, a person with a WAD II injury will present with neck complaints and musculoskeletal signs. The Grade II whiplash guideline (also known as the pre-approved framework ) sets out the goods and services that may be provided without insurer approval. It is a guide for diagnosing WAD II injuries and describes a short course of treatment. Section 2 of the Grade II whiplash guideline defines the impairments that come within the guideline. Complaints of non-radicular back symptoms associated with WAD II do not exclude the impairment from the guideline. Other common symptoms, including shoulder pain, referred arm pain, dizziness, tinnitus, headaches, difficulties with hearing, memory acuity, dysphagia and temporo-mandibular joint pain, also do not exclude the impairment from the guideline unless they require separate treatment from that provided under this guideline. The insured submitted that she sustained impairments that did not come within the Grade II whiplash guideline. She referred to other significant impairments, including sacroiliac joint dysfunction, chronic pain, and psychological impairment, that are distinct from WAD II. The symptoms persisted beyond the period covered by the guideline and required separate treatment. Economical took the position that all of her problems related to the WAD II injury. The arbitrator found that Section 5(2)(e) incorporated the entire Grade II whiplash guideline by reference. Given that this scheme is full of exceptions and exemptions, so is Section 5(2). The arbitrator cited a number of examples of problems that would exclude an insured from the Grade II whiplash guideline. He noted in particular that an insured person may be excluded from the guideline if: 1. The insured person s complaints include radicular back symptoms; 2. The insured person has other significant impairments (distinct from the WAD II) arising from the same accident; or 3. The insured person has additional symptoms associated with WAD II that require separate treatment from that provided under the guideline.

The arbitrator held that the diagnosis of WAD II did not determine the applicability of Section 5(2). Rather, the issue becomes whether or not the impairment comes within the WAD II whiplash guideline. He stated that each case must be carefully determined upon its own facts. Psychological impairment, either as a distinct injury from WAD II or an additional symptom of the WAD II that required separate treatment from that provided under the guideline, took her out of the whiplash guideline. 5. RELIEF FROM FORFEITURE - LATE NOTICE OF THE SABS CLAIM - Cervo v. State Farm, [2006] CanLII 37119 (ON.C.A.) The Appellant, Gerardo Cervo, was injured in a motor vehicle accident on December 1, 1994. Section 59(1) of the then applicable Statutory Accident Benefits Schedule, Ontario Reg. 776/93, obliged him to have notified State Farm of the accident within 30 days or as soon as practicable thereafter. Section 59(4) provided that a failure to comply with the time line set out in subsection (1) does not disentitle a person to benefits if the person has a reasonable excuse. Section 129 of The Insurance Act provides: 129. Whether there has been imperfect compliance with the Statutory Condition as to the proof of loss to be given by the insured or other matter or thing required to be done or admitted by the insured with respect to the loss and the consequent forfeiture or avoidance of the insurance in whole or in part, and the Court considers it inequitable that the insurance should be forfeited or avoided on that ground, the Court may relieve against the forfeiture or avoidance on such times that it considers just. The Respondent argued that Section 59(4) occupied the field if relief from forfeiture under Section129 of the Act was not available. The Court of Appeal rejected this submission. There was nothing in the language of Section 59 that rendered nugatory the more general and well known relief from forfeiture provided in Section 129 of The Insurance Act.

Section 59's reasonable excuse and the criteria under Section 129 were significantly different. The Court of Appeal referred to the Supreme Court of Canada decision in Falk Bros. Industries Limited v. Alliance Steel Fabricating Co., [1989] 2 S.C.R. 778, with the proposition that the failure of an insured to comply with the time limit for giving notice of a potential claim to an insurer is imperfect compliance covered by Section 129. The Ontario Court of Appeal confirmed the Supreme Court s analysis that Section 129 is a remedial section that should be given broad interpretation to prevent hardship to beneficiaries where there has been a failure to comply with the condition, and where leniency in respect of strict compliance will not result in prejudice to the insurer. The motions Court Judge had identified the only hardship to the Appellant as being the risk of an action against his lawyer. The motions Court Judge described the prejudice to State Farm as the loss of an opportunity to conduct early examinations and to provide therapeutic interventions. Ultimately, the motions Court Judge refused to grant relief from forfeiture. The first notice to the insurer was November 29, 1996, approximately 2 years post-accident. In dissent, Mr. Justice MacPherson found that there was significant prejudice by denial of the SABS and he did not think that the record put forward by State Farm supported a finding of strong prejudice. Mr. Justice LaBrosse, for the majority, stated that reliance on a solicitor was not a reasonable excuse. The actions of the solicitor were the actions of the principal. Complexity of the legal issues was also not a reasonable excuse. There was no disadvantage to simply applying immediately after the accident took place.

The majority of the Court of Appeal deferred to the trial Judge s exercise of discretion. The majority noted that the dissenting Judge would have exercised his discretion differently and put more weight on the hardship to Cervo than on the prejudice to State Farm. Mr. Justice LaBrosse stated: In my respectful opinion, it is an error for this Court to substitute its preference of the evidence when the motions Judge made no mistake in the exercise of her discretion. The Cervo decision may be contrasted with the Director s Delegate s decision in Coseco Insurance Company and Novakovic, (F.S.C.O. Appeal P05-00016), June 22, 2006). This Appeal dealt with the applicability of Section 32(1) of the SABS - 1996, which requires a claimant to notify the insurer within 30 days after the circumstances arose that give rise to entitlement to the benefits, or as soon as practicable thereafter. Mr. Novakovic gave notice in October 2002, over 4 years post-accident. The arbitrator ruled that Mr. Novakovic had a reasonable explanation for the delay pursuant to Section 31(1). Mr. Novakovic was 14 years of age when struck by a car. While the insured was a minor at the time of the accident, the arbitrator concluded that he did not notify Coseco as soon as practicable following his 18 th birthday. The defence was really based on the finding of reasonable explanation. Mr. Novakovic was ignorant of the law. There were a number of family and cultural issues which delayed his bringing notice. The arbitrator found limited prejudice particularly given that the limitation period set out in subsection 32(1) was postponed from March 24, 1998 to June 14, 2001, when Mr. Novakovic turned 18. There was little evidence of further prejudice between July 14, 2001 and October 17, 2002, when the notice was given. The Director s Delegate reiterated the principles which govern the interpretation of the words reasonable explanation in Section 31(1) of the Schedule as follows: An explanation must be determined to be credible or worthy of belief before its reasonableness can be assessed.