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Recent commentaries on the deductibility of collateral benefits in income loss claims

November 10, 2011

Presented at McCague Borlack LLP's
Transportation Law Practice Group Seminar

Introduction

Black's Law Dictionary defines the collateral source-rule, also known as the collateral benefits rule, as “the doctrine that if an injured party receives compensation for the injuries from a source independent of the tortfeasor, the payment should not be deducted from the damages that the tortfeasor must pay.”1 Over time, this rule has evolved to allow tortfeasors and/or their insurers to deduct certain amounts already received by the plaintiff in order to ensure that the plaintiff does not receive double recovery.

Collateral benefits have been the subject of much legal consideration as parties often disagree over which amounts should be deducted from tort awards, especially in the area of income loss. In determining which amounts are deductible, the court must balance the principles of compensating the plaintiff, while also avoiding overcompensation or double recovery.

In writing for the Supreme Court of Canada in Cunningham v. Wheeler, [1994] S.C.R. 359 (S.C.C.), Cory J. emphasized the principle of recovery in a tort action. While the courts aim to compensate the injured party for the negligence and wrongdoing of the tortfeasor, this compensation must carefully be weighed with the concept that the plaintiff is not entitled to double recovery for any loss that results from the injury.2

It is also important to consider, that the purpose of tort law is not punitive, but rather, compensatory.

In the recent Ontario Superior Court decisions of Anand v. Belanger, 2010 ONSC 5356 [Anand] and Demers v. B.R. Davidson Mining & Development Ltd. 2011 ONSC 2046 [Demers], the court has considered a number of different issues surrounding the deductibility of collateral benefits in tort awards for income loss. This paper provides a brief overview of the Anand and Demers decisions of the court with respect to deductibility of benefits.

The Legislation

In an effort to more concisely set out which benefits should be deducted from tort awards for loss of income and loss of earning capacity, section 267.8(1) of the Insurance Act, R.S.O. 1990, c.I.8 was enacted. This provision has been the subject of judicial interpretation and legislative reform over the last decade and, in its most recent form, states:

Collateral benefits
Income loss and loss of earning capacity

267.8  (1)  In an action for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of an automobile, the damages to which a plaintiff is entitled for income loss and loss of earning capacity shall be reduced by the following amounts:

  1. All payments in respect of the incident that the plaintiff has received or that were available before the trial of the action for statutory accident benefits in respect of the income loss and loss of earning capacity.

  2. All payments in respect of the incident that the plaintiff has received or that were available before the trial of the action for income loss or loss of earning capacity under the laws of any jurisdiction or under an income continuation benefit plan.3

Andad v. Belanger, 2010 ONSC 5356

In Anand, the plaintiff, Mrs. Geeta Anand was injured in a motor vehicle accident on April 26, 2003. The plaintiff commenced three separate claims: one against her insurer for accident benefits, one against ManuLife for termination of disability benefits and a tort claim.

As a result of the accident, Mrs. Anand was unable to return to work and received income replacement benefits (“IRBs”) through her insurer for accident benefits from April 26, 2003 to July 5, 2005. Mrs. Anand brought an application for arbitration alleging that her insurer terminated her benefits prematurely. Mrs. Anand settled with her insurer prior to the arbitration for the all inclusive sum of $120,000.00. After paying her legal fees and disbursements, Mrs. Anand received $80,040.00.

Mrs. Anand also had a workplace policy of insurance through ManuLife through which she qualified for long and short term disability. Mrs. Anand brought an action against ManuLife after her long term disability benefits were terminated, claiming entitlement to past and ongoing long term disability benefits, as well as bad faith. The action was settled for the all inclusive sum of $125,000.00 and after paying her legal fees and disbursements, Mrs. Anand received $95,000.00.

Mrs. Anand also commenced a tort action against the tortfeasor. It was determined that the vehicle that struck Mrs. Anand's vehicle was stolen, and the driver of same was uninsured. Accordingly, Mrs. Anand added her own insurer, State Farm, to the claim. The tort action proceeded to a jury trial in April 2010 wherein the only issue at trial was damages. The jury assessed Mrs. Anand's damages as $85,000.00 for general damages, $161,679.00 for past income loss, and $25,000.00 for future loss of income.

After assessing the damages, the court was asked to consider whether the amounts Mrs. Anand received for the accident benefits claim and ManuLife settlement were deductible from the tort award for loss of income, pursuant to section 267.8(1). As set out herein, section 267.8(1) provides that the damages a plaintiff is entitled to for income loss and loss of earning capacity shall be reduced by all payments in respect of the incident that the plaintiff has received or that were available before the trial of the action for statutory accident benefits in respect of the income loss and loss of earning capacity, or under the laws of any jurisdiction or under an income continuation plan.4

Accident Benefits

The court examined the issue and ultimately concluded that the accident benefits settlement for IRBs received by Mrs. Anand fell within the scope of section 267.8(1)1 and should be deducted from the tort award for income loss.

In conducting their analysis, the court looked at the settlement documents, particularly the Settlement Disclosure Notice. Under Income Replacement, the Settlement Disclosure Notice stated: “you have been offered $100,000.00 for all past and future income replacement benefits.”5

The court concluded that the language on the mandatory Settlement Disclosure Notice provided the evidence required to establish that the income replacement payment falls within the scope of section 267.8(1).

The court ruled: “[i]n my respectful view, in light of the express terms of the document and Mrs. Anand's signature on it, would do violence to that language and the contents of the statute to attempt to characterize the $100,000.00 as something other than “for statutory accident benefits”: she expressly accepted an offer that specified that amount was for “income replacement benefits”.6

Accordingly, the court ruled the amounts set out in the Settlement Disclosure Notice are deductible from the tort award for loss of income.

ManuLife Settlement

In deciding whether the ManuLife settlement for short term and long term disability should be deducted from the tort award for income loss, the court considered the earlier Ontario Superior Court decision in Cromwell v. Liberty Mutual Insurance Co. (2008), 89 O.R. (3d) 252 (S.C.J.), wherein the court referred to the Supreme Court of Canada decision in Minister of National Revenue v. Armstrong, [1956] S.C.R. 446 (S.C.C.). In these cases, the court analyzed whether the payment was made pursuant to legislative requirements or whether it was an amount paid to obtain a release from liability.7

The court also considered the release signed by Mrs. Anand in favour of ManuLife. The release stated that Mrs. Anand released ManuLife “from...any and all manner of actions...claims...with respect to the [LTD policy], including but not limited to non-payment of disability benefits...for damages, punitive or otherwise relating to...non-payment of any disability benefits...”8

Based on the foregoing, the court concluded that ManuLife and Mrs. Anand agreed to settle all future and past obligations, including disability payments, punitive damages, interest and costs in the settlement, and that the settlement was not made pursuant to legislative requirements. The court concluded that the payment made by ManuLife to settle Mrs. Anand's claim was not “under an income continuation benefit plan” but instead, considered it a payment to settle a legal obligation.

Based on the wording of the Insurance Act provision, payment for settling a legal obligation would fall outside the scope of s.267.8(1)2. As such, the settlement received by Mrs. Anand from ManuLife was not deductible from the tort award for income loss.

Gross or Net Settlement Amount when Deducting from the Tort Award?

Finally, the court was asked to consider whether the amounts including the settlement for disbursements and legal fees should be included in the settlement amount when making deductions from the tort award for loss of income.

"...it is entirely reasonable for those plaintiffs to be required to account to their tortfeasors of the sum they actually received, such that double recovery is avoided and overall automobile insurance rates are kept low..."

State Farm took the position that the amount deducted should be the total amount of the accident benefits settlement (the $120,000.00 paid to Mrs. Anand's lawyer for settlement of the accident benefits claim). Conversely, Mrs. Anand took the position that only the net amount she received, $80,040.00, should be used in the deduction. Mrs. Anand argued that she did not “receive” $120,000.00 as she had to pay $39,960.00 for legal fees and disbursements.

The court reiterated the purpose of s.267.8(1) which is namely to avoid double recovery. The court, concluded that it would be inequitable and contrary to this principles of tort law if the tortfeasor received the benefit of the gross amount, when the plaintiff had no choice but to incur these legal fees and disbursements to recover the amounts she believed were outstanding.

The court further stated:

It is one thing to accept (as I do) that the purpose behind s.267.8(1) is to avoid double recovery of the injured parties who receive an award of damages for loss of income in a tort proceeding and also received income replacement benefits and long term and short term disability payments; it is entirely reasonable for those plaintiffs to be required to account to their tortfeasors of the sum they actually received, such that double recovery is avoided and overall automobile insurance rates are kept low. It is quite something else, however, for the tortfeasor (or more accurately its insurer) to reap the benefits of the risk and expense undertaken by the plaintiff in commencing legal proceedings and risking adverse cost consequence (not to mention her own legal expenses) pursuing a claim for unpaid IRBs or STDs or LTDs, without the tortfeasor/insurer bearing the costs of accomplishing that result. To follow the defendant's worse position than someone who does not. Such a result would be illogical.9

Accordingly, the court awarded a credit of $80,040.00, the net settlement amount, to State Farm.

Demers v. B.R. Davidson Mining & Development Ltd., 2011 ONSC 204610

In this 2011 Ontario Superior Court decision, the court was asked to consider three issues: (1) whether private pension benefits were deductible from the tort award for income loss; (2) whether the amounts used in the deduction, should the court conclude that private pension benefits are deductible, be gross or net of income tax and; (3) whether interest should be included in the deductions.

The plaintiff, Mrs. Demers, was injured in a car accident on April 27, 1999. Following the accident, Mrs. Demers returned to work on a modified basis. On or around February 21, 2003, Mrs. Demers stopped working due to her injuries.

Mrs. Demers qualified for and received short term disability benefits, long terms disability benefits, and income replacement benefits. Mrs. Demers also received Canada Pension Plan (“CPP”) disability benefits and Hospitals of Ontario Pension Plan (“HOOP”) disability pension benefits.

Mrs. Demers, and the defendant, B.R. Davidson Mining & Development, agreed that the short term, long term and income replacement benefits were deductible, but disagreed as to whether CPP and HOOP disability benefits were deductible.

CPP Disability Benefits & HOOP Disability Benefits

In determining whether CPP disability benefits and HOOP disability benefits are deductible from tort award for income loss, the court concluded that the test is whether the payment received by the plaintiff is characterized as an indemnity or a non-indemnity payout. This principle was first set forth in the 1988 Report of Inquiry into Motor Vehicle Accident Compensation in Ontario, wherein Osborne J. wrote:

In principle, non-indemnity payments should not be considered in the discussion of the collateral source rule since they do not result in true overcompensation. Indemnity payments, on the other hand, can clearly be identified as duplicating an item of damage claimed from the tortfeasor and accordingly do constitute overcompensation.11

Shaw J. applied the test to the benefits received by Mrs. Demers and concluded that CPP disability pensions and private pension disability benefits are non-indemnity payments, as they are not paid to indemnify a plaintiff for a pecuniary loss.12

Accordingly, they are not deductible from tort awards as they do not result in overcompensation.

Despite this characterization, the court had to consider the provisions in section 5.2 of the Ontario Regulation 461/96 for accidents that occur after October 1, 2003. Section 5.2 of the O. Reg. provides that CPP benefits are deductible, in light of s.267.8(1) of the Insurance Act. Section 5.2 states:

For the purposes of paragraph 2 of subsection 267.8(1), paragraph 2 of subsection 267.8(9) and subclause 267.8(12)(a)(ii) of the Act [the Insurance Act] payments in respect of an incident for income loss or loss of earning capacity under income continuation benefit plan shall be deemed to include the following payments, if the incident occurs on or after October 1, 2003:

1. Payments of disability pension benefits under the Canadian Pension Plan.13

In Demers, the court clarified that CPP disability benefits and private pension disability benefits should not be treated differently (and should not be deductible) unless the legislation specifically requires a benefit to be deductible, such as is the case with CPP. With regards to the deductibility of CPP, it is important to consider whether the accident occurred before or after October 1, 2003.

Gross or Net Amounts of Income Tax when Deducting from the Tort Award?

Notwithstanding the decision of the court, Shaw J. then considered whether in the event that the court was incorrect regarding the deductibility of private pension plans, whether the net or gross income tax amount should deducted.

The court examined the wording of section 267.8(1)2 and concluded that the phrase “received or that were available” must be considered.14 Notwithstanding the fact that other provisions in the same section in the Insurance Act use the phrase “net income loss” and “net loss of earning capacity”, the court decided that the amount Mrs. Demers received for CPP disability benefits and HOOP disability benefits were net of income tax and therefore, there is no overcompensation.

Deductibility of Interest Amounts

Finally, the court considered whether the interest received by Mrs. Demers in her accident benefits award was deductible from the tort award for income loss.

Pursuant to section 46 of Part X of the Statutory Accident Benefits Schedule, Mrs. Demers received $40,405.00 from her statutory accident benefits insurer as interest on overdue income replacement benefits.

In deciding whether the amount should be deductible, the court looked at the purpose of the overdue interest provisions for late payment of a benefit under the Statutory Accident Benefits Schedule. The court concluded that the overdue interest is not a payment received for statutory accident benefits in respect of income loss and loss of earning capacity, nor is it punitive. The purpose is to compensate the plaintiff for the “time value money” lost.15 Therefore, interest is not deductible from the tort award.

Conclusion

Through both the Anand and Demers decisions, the Ontario Superior Court has provided guidelines to practitioners as to what collateral benefits should be deducted from tort awards for income loss claims.

The court has consistently ruled that the first consideration when looking at section 267.8(1)1 or section 267.8(1)2 of the Insurance Act, is to consider whether the payment received by the plaintiff would result in double recovery and/or overcompensation. When completing this analysis, it is imperative that the type of payment received by the plaintiff is considered and whether the amount received is an indemnity or non-indemnity payment.

Further, the court has clarified that legal fees, disbursements and interest on accident benefit claims should not included in the amount deducted from the tort award for income loss.

In light of the decisions in Anand and Demers, it is important for insurers and practitioners alike to characterize and consider the types of payments received by the plaintiff for collateral benefits. Ultimately, the main consideration when conducting this analysis is to consider whether the plaintiff is being overcompensated and/or receiving double recovery by receiving the tort award and collateral benefit.


1 Black's Law Dictionary, 8th ed., s.v. “collateral source rule”.

2 Cunningham v. v. Wheeler, [1994] S.C.R. 359 (S.C.C.). 

3 Insurance Act, R.S.O. 1990, c.I.8

4 Ibid

5 Anand v. Belanger, 2010 ONSC 5356 at para 17 [Anand].

6Anand v. Belanger, 2010 ONSC 5356 at para 17 [Anand].

7 Ibid at paras 21-23.

8 Ibid at para 24.

9 Anand at para. 32.

10 At the time of drafting this paper, the writer understands that this decision is being appealed. The Demers decision sets out a complex analysis of collateral benefits and the legislative history of section 267.8(1)1 and 267.8(1)2 of the Insurance Act. For the purposes of this paper, only a brief overview of the analysis has been included. For a complete overview of the rationale, commentary and analysis of the issues, kindly refer to the original decision.

11 Demers v. B.R. Davidson Mining & Development Ltd. 2011 ONSC 2046 at para. 4 [Demers]; Ontario Ministry of the Attorney General, Report of inquiry into motor vehicle accident compensation in Ontario, 1988 (Toronto: Ontario Ministry of the Attorney General, 1988).

12 Demers at para.69.

13 O.Reg. 461/96, s.5.2

14 Demers at paras. 92.

15 Demers at paras. 107 and 108.


 

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