Canada: The Importance Of Clear, Unequivocal Refusals

Case Comment: Falcon And State Farm

What constitutes a valid refusal of an accident benefit on the part of an insurer?

FSCO Arbitrator Anne Morris was required to revisit the issue in the hearing of Jody Falcon ats State Farm, with reasons released on February 16, 2016.

The Arbitrator's conclusion will be a surprise to many in the insurance industry as all three

Explanations of Benefits ("OCF-9s") delivered by State Farm were considered to be invalid. As a consequence, no limitation period had been triggered, allowing the insured to pursue entitlement to an Income Replacement Benefit notwithstanding the passage of five and a half years since entitlement was disputed.

The case-law holds that a valid refusal must be clear, unequivocal and include reasons. The insured must be informed of his or her right to dispute the insurer's refusal to pay a benefit. The onus is on the insurer to demonstrate that its refusal meets these requirements. Failure to explain the insured's right to dispute is sufficient grounds to invalidate a refusal. This ultimately was the fatal flaw in most of the OCF-9's that were the subject of this dispute.

The insured had been involved in an accident on May 11, 2008. He sought accident benefits from State Farm. He was paid an Income Replacement Benefit up to May 18, 2009. State Farm sent the insured three OCF-9's in an attempt to terminate the Income Replacement Benefit.

Two OCF-9s were dated April 17, 2009. One explained that pursuant to an IME opinion it was advisable for the insured to return to employment. It explained that the Income Replacement Benefit would be paid "up to May 18, 2009." The insured was directed to "see our other Explanation of Benefits dated 4/17/09 for details." Arbitrator Morris concluded that this did not constitute a clear refusal of benefits.

In the second OCF-9 of April 17, 2009, the insured was referred to two IME assessments, and he was informed that since he did not suffer a substantial inability to perform his employment, the benefit would be "discontinued effective 5/18/09 pursuant to s.37 of the SABS." The insured was advised that if he disagreed with the decision he was entitled to "submit a rebuttal examination" and a letter attaching a summary of the rebuttal procedure was attached. Arbitrator Morris considered this inadequate because the Explanation excluded references to steps such as mediation and arbitration.

The third OCF-9 was dated July 9, 2009. The insured was advised to "refer to the previous Explanation of Benefits dated April 17, 2009 wherein the benefit was denied or deemed not payable."

The problem for State Farm was that the prior OCF-9's did not constitute a clear and unequivocal denial of the benefit. If the earlier OCF-9's were deficient, then the subsequent OCF-9 of July 9, 2009 that referred to the prior notices was also deficient.

The Arbitrator also considered it unreasonable that an insured would have to "piece together" OCF-9's of different dates to arrive at a valid refusal.

Significantly, all the OCF-9's contained the standard section that sets out the insured's rights to dispute ("Step 1: Notify Your Insurer/Further Examination" and "Step 2: Mediation" followed by "Step 3: Arbitration/Lawsuit or Evaluation"). The Arbitrator seems not to have been persuaded that this section of the form would be adequate notice of the dispute resolution process.

Of importance to the Arbitrator was the perspective of the "unsophisticated person." Exactly what this standard would require in the circumstances is not spelled out, but the decision would imply the following about best practices when it comes to issuing denials of accident benefits:

  • A valid denial must include a reference to the dispute resolution process, and this means informing the insured directly of his or her rights to engage in the mediation and arbitration process.
  • It will not always be adequate to rely on the description of the dispute resolution process in section 6 of the OCF-9.

Some might argue that in a case like this, it would have been obvious that a benefit was being refused, given that the insured was sent at least two IME assessments along with three OCF-9s, two of which made reference to the benefit being stopped.

But evidently the law on the issue is not that simple. The decision highlights the high demands made on insurers in respect of issuing valid denials. Lawyers who advise insurers would be well-advised to consider whether benefits have been denied with a clear and unequivocal refusal that also provides specific information about the dispute resolution process.

Read the full case decision Falcon and State Farm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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