On-Risk E-Bulletin @ Gowlings: March 22, 2010

Edited by Paul Stein and Tanya Frizzell

• Message From The Executive Editors
• Risk Management - A Hot Topic
• Alberta Refresher Settlement Under The Minors' Property Act
• The Alberta Minor Injury Cap - Squeeze Or Cut?
• Credibility In Personal Injury Actions
• Paralysis Arising From Genital Herpes Determined Not To Be Loss Sustained Through Accidental Means
• Insurer Estopped From Denying Coverage

Message From The Executive Editors
By: Tanya Frizzell , Calgary

In this issue of Gowlings' On-Risk E-Bulletin, three professionals from our Montreal office have prepared an article on risk management from the perspective of Board members.

Derrick Pagenkopf from the Calgary office provides two articles addressing Alberta personal injury claims. The first discusses the settlement of claims of minors under the Alberta Minors' Property Act. The second examines the two methods of approaching the minor injury cap and whether insurers should "squeeze or cut".

Taryn Burnett from the Calgary office provides a commentary on the recent Alberta Court of Queen's Bench decision highlighting the importance of credibility in a personal injury action. In Tavakoli v. Junghans, the trial Judge dismissed the plaintiff's personal injury claim entirely.

The recent Supreme Court of Canada decision Co-operators Life Insurance Co. v. Gibbens, addressing the definition of accident in the context of a group life insurance policy, is discussed by Elisa Scali from the Ottawa office. In Gibbens, the Supreme Court of Canada determined that paralysis suffered as a consequence of genital herpes was the result of a disease in the ordinary course of events and outside the scope of coverage.

Finally, Joni Funk from Calgary provides a commentary on the Ontario Court of Appeal decision in Logel v. Wawanesa, which addressed the ability of an insurer to rely upon an insured's breach of a statutory condition to deny coverage under the policy.

We hope you enjoy this issue of Gowlings' On-Risk E-Bulletin and look forward to providing further information to you on insurance related developments as the year progresses. We welcome your questions and feedback. Please feel free to contact the Executive Editors or the authors of the various articles and case comments if you would like further information.

Risk Management - A Hot Topic
By: Martine Guimond , in collaboration with Carine Taza and Julie-Martine Loranger , Montreal

Topical news items such as the H1N1 pandemic, financial scandals, the recession and the Copenhagen summit on climate change were all in fact pre-existing risks that suddenly materialized.

Risk management is a growing topic of discussion both in regulatory circles and at Board meetings.

In fact, in the aftermath of the financial scandals of the 2000s, regulators have been focusing on compliance and disclosure requirements, thus placing the responsibility on the audit committee.

With the recent economic crisis that reverberated around the world, regulators have shifted emphasis from compliance to risk management. Indeed, many felt that some situations were foreseeable and could have been avoided or at least tempered.

To help Boards and their directors better manage risks, we will discuss (i) the objectives of risk management, (ii) how to identify risks, and (iii) how to better manage risk.

Strategic Planning

Today's Boards are being held increasingly accountable for participating in the development of their organization's strategic direction, approving it and ensuring that appropriate processes and controls are in place to identify, manage and monitor the business risks that follow from their organization's business strategy.¹

The objective of risk management is to find a balance between the inherent risks and business opportunities facing the organization.

Identifying Risks

The first step in the risk management process is to identify the risks facing the organization. It is important to identify both external risks and internal risks. To this end, the Board must know and understand their organization well. Examples of external risks include the economy, applicable regulations and the competitive landscape and can take the form of new market conditions, changing environmental issues, crises, new political and regulatory contexts or technological developments. Internal risks include product and service quality, business strategy, the organization's strength and ethics.

To identify these risks, the Board must meet at least once a year to develop a strategic plan. To this end, it must have an in-depth knowledge of the risks that could have an impact on the organization's ability to meet its strategic objectives.

During this strategic planning meeting, the Board and management must identify and monitor the organization's principal risks, plan a risk management process and, above all, put in place internal controls to manage these risks.

Four Possible Strategies

There are four types of risk management strategy:

1. Avoid risk by choosing not to undertake certain types of activity;
2. Transfer risk to third parties through insurance, hedging and outsourcing;
3. Mitigate risk through preventive and detective control measures; and
4. Accept risk, where the benefits of doing so outweigh the costs of transfer or mitigation.²

In the strategic planning process, the organization must take into account its appetite and capacity for risk and use techniques such as risk and sensitivity analysis to determine its exposure to risk. To facilitate this exercise, the organization should develop policies and procedures for strategic planning that include definitions and categorization of risks. These policies must then be communicated to everyone in the organization.

Monitoring Is Key

While identifying risk and implementing policies and procedures to manage it is extremely important, monitoring performance against key targets is an essential business practice. Boards need assurance that management at all levels does this and should understand in general terms what procedures are in place. Moreover, managers throughout the organization must be involved and receive regular reports on performance and provide explanations of variances and planned corrective action.

Ultimate Responsibility

In conclusion, directors are ultimately responsible for accurately identifying the risks confronting the organization and managing them effectively by implementing the necessary internal controls and policies while at the same time allowing the organization to capitalize on business opportunities. To this end, some Boards will decide to form a risk management committee. In our opinion, what is most important is to carefully analyze the company's business model and size and to put in place policies developed and implemented by senior management, because in the end, even if the task of risk management is assigned to a committee, the Board is still accountable.

Please feel free to contact the authors, or any of the professionals at Gowlings, who can assist you to evaluate the risks facing your company and your responsibility as a director.

Alberta Refresher Settlement Under The Minors' Property Act
By: Derrick Pagenkopf , Calgary

The current Minors' Property Act (Alberta) ("MPA") came into force in Alberta on January 1, 2005. Our experience with clients suggests that it might be a good time to review the settlement procedure set forth under the Act. We are aware that some clients have or are using forms created for the "small obligations" provisions under the Act in settlements for small amounts (less than $5,000) to avoid obtaining a court ordered settlement. What follows is a refresher on settlement in the context of the MPA.

The MPA makes clear under s. 4(3) that "a settlement of a minor's claim is binding on the minor only if the settlement is confirmed under subsection (2)." In our view there is no language in the MPA that could lead to the conclusion that the "small obligations" section creates an exception to the clear language in section 4(3). The only relationship between section 4 of the Act and the "small obligations" section is that section 4(4)(c) permits the court a discretion to order payment of the settlement amounts to whomever it sees fit (e.g. the minor) if the amount is less than the amount specified in the Regulation (currently $5,000).

Where clients elect to use a procedure other than specified under s. 4, such as the "small obligations" procedure or a release and discontinuance, they should do so with the understanding that the potential remains that the minor could in future bring a further or additional claim.

Unfortunately, the MPA does not account for the possibility that settlement will occur without involvement of the court. We recognize that this puts our clients in a difficult position as not every settlement merits legal involvement. We also appreciate that our clients are sophisticated at assessing risk and can make the determination as to what risk to accept.

Given that we have all been working with the MPA since 2005 we thought it would be a good idea to remind our clients that routinely used settlement procedures may not provide an enforceable release.

The Alberta Minor Injury Cap - Squeeze Or Cut ?
By: Derrick Pagenkopf , Calgary

As claims increasingly require assessment of the minor injury cap one area of debate that has arisen is whether the cap reflects the top end in a range of damages or it is simply a cut-off amount. In the unreported decision of Park v. Jordan (QB 0801-00138), the Court addresses this issue that arises under the Minor Injury Regulation, Alta. Reg. 123/2004 (the "MIR").

Some take the position that in practice the pre-cap range is now squeezed into a new range from $0 to the specified cap amount. In this scenario, the cap represents the quantum available for the most serious injuries and the range is squeezed in below that point to reflect a new range of decreasing severity.

Others take the position that the cap represents a cut-off. Whatever the appropriate damages were prior to the cap, any amount above the specified cap is cut off. In this scenario, if prior to the cap the injury was worth $6,000 or $50,000, the claimant is entitled to any amount up to and including the cap. If the claim is so minor that it would have been worth less than the cap, then that is the entitlement.

Of note, the assessment in either case requires an assessment as to the value of the claim in the absence of the cap. The only question is whether to squeeze or cut. We note that as time progresses and inflationary adjustments are taken into account, it may be that the cap becomes the minimum award under the cut-off interpretation.

In Park, supra, the Court had to assess both minor and non-minor injuries. The court addresses the cap mechanism as follows:

This early decision on the issue suggests that court will cut, not squeeze. Based on our review of the legislation we do note that there is some room to argue that application of the cap is different if there is assessment of only minor injuries. Although it will be necessary to monitor decisions to see how courts treat this as time goes on we consider it likely that, in the end, the cap will be treated as a cut-off not a new top end of the range for injuries that are properly considered as a "minor injury" under the MIR.

Finally, we note that the court reduced the capped minor injury amount to account for contributory negligence. This favours the defendant because the actual damage amount is reduced after the cut-off as opposed to being applied to the overall damage amount. Again, we will have to see how courts apply this in the future.

Credibility In Personal Injury Actions
By: Taryn Burnett , Calgary

Summary

The 2009 decision of the Alberta Court of Queen's Bench in Tavakoli v. Junghans highlights the importance of credibility in a personal injury action.

The plaintiff, Akbar Tavakoli, sought damages for injuries sustained in a motor vehicle accident on June 23, 2002. The court found that the plaintiff was not a credible witness and, accordingly, his evidence was not accepted by the court in determining causation. Further, the evidence of those treating and medical professionals who based their conclusions on the plaintiff's self-reported symptoms was not accepted by the court in determining causation. Clark, J. dismissed the action in its entirety on the basis that the objective evidence of the treating and medical professionals did not, on a balance of probabilities, demonstrate that the plaintiff's injuries were caused by the motor vehicle accident.

Credibility

Credibility was the most significant issue at trial. Justice Clark noted that no medical examiner over the course of the past seven years was able to find a physical, organic or structural cause for the plaintiff's complaints, and no psychiatric or psychological examiner was able to agree on a diagnosis.

Justice Clark undertook an examination of the plaintiff's credibility. In arriving at his conclusion that the plaintiff lacked credibility, Clark, J. considered the following: 1) test results which indicated a significant tendency to exaggerate; 2) obstructive and extreme behaviour by the plaintiff during a medical examination; 3) inconsistencies in the plaintiff's testimony when compared to the documentary evidence and oral evidence of other witnesses; 4) inconsistencies in behaviour while being tested by medical examiners as compared to his behaviour while in the testing room but not being tested; 5) inconsistencies between the plaintiff's subjective complaints and objective findings; and 6) exaggeration or embellishment by the plaintiff in his reports of physical and psychological complaints (i.e., plaintiff's subjective symptoms were extravagant and did not fit any known physical disease or identifiable physical abnormalities).

Justice Clark noted that the plaintiff's pattern of seeking treatment from multiple physicians concurrently had, to an extent, allowed him some control over his course of treatment. He further found that the plaintiff told different doctors different stories about his medical past leading to a diagnosis on incomplete and sometimes erroneous information.

In addition, Justice Clark considered the plaintiff's decision not to pursue a number of treatments that were suggested to him but instead opting for passive treatments. The plaintiff's brushes with law enforcement and his failure to disclose all earned income on his tax returns were also found to have an adverse affect on his credibility.

Having regard to the foregoing, Clark, J. held that the plaintiff's lack of credibility had a significant bearing on the crucial issue before the court, namely the extent to which the plaintiff had honestly and accurately represented his complaints and the subsequent effect on proving causation for the alleged injuries.

Insufficiency Of Evidence - Causation Not Proven

Ultimately, Clark, J. held that none of the plaintiff's testimony would be accepted to establish his claim as he lacked credibility. As such, Clark, J. was left with the objective findings of medical professionals who treated the plaintiff who were not influenced by the plaintiff's subjective reports of injury. Justice Clark went so far as to find that based on video surveillance, the plaintiff grossly exaggerated the seriousness of any injuries he may have sustained in the 2002 accident and, in fact, went into the realm of intentional fabrications.

Considering the evidence in its entirety, Clark, J. found that it was difficult to separate the truth from the gross exaggerations and lies to determine whether the plaintiff did suffer an injury and to what extent. The result was that there was insufficient evidence to establish the plaintiff's injuries and causation of the injuries was not proven.

Paralysis Arising From Genital Herpes Determined Not To Be Loss Sustained Through Accidental Means
By: Elisa Scali , Ottawa

In the recent decision of Co-operators Life Insurance Co. v. Gibbens , the Supreme Court of Canada considered the definition of "accident" in the context of a group insurance policy, which provided coverage for losses sustained through accidental means. The court held that an unexpected bodily injury which is caused by a disease that is transmitted in the ordinary course through natural processes, cannot be accidental.

Facts

The insured, Gibbens, had unprotected sex with three women and contracted genital herpes. Gibbens subsequently suffered from a rare but known complication of herpes, transverse myelitis (inflammation of the spinal cord), which resulted in total paralysis from mid-abdomen down.

Gibbens applied for accidental disease/dismemberment benefits under his group insurance policy, which provided coverage for losses "resulting directly and independently of all other causes from bodily injuries occasioned solely through external, violent and accidental means". Gibbens claimed that while he was aware of the risk of contracting a sexually transmitted disease when having unprotected sex, he did not expect to suffer from transverse myelitis and become paralyzed. Accordingly, Gibbens argued that his condition should be deemed to have arisen through accidental means within the meaning of the policy. The insurer denied Gibbens' application for benefits.

Trial Decision - Paralysis unexpected result of unprotected sexual intercourse and therefore accidental

Gibbens sued the insurer for coverage under the group insurance policy on the basis that the paraplegia qualified as a "bodily injury" which occurred through "accidental means" within the meaning of the policy. The insurer argued that the paraplegia was caused by disease, and therefore not accidental. The trial judge relied on the decision in Martin v. American International Assurance Life Co. , and held that in order to determine whether the injury resulted from an "accident", what must be considered is whether the consequences were unexpected (the "expectation test"). Accordingly, the question the court asked was "whether Mr. Gibbens expected to become a paraplegic as a result of having unprotected sexual intercourse". The court stated "disease which does not result from a natural cause may be accidental". Gibbens was awarded $200,000 plus interest and costs on the basis that paraplegia was unexpected and therefore accidental.

Decision Upheld On Appeal - Paralysis unexpected and the result of an unlooked for mishap and therefore accidental

The insurer appealed the trial judge's decision. On appeal, the court rejected the trial judge's finding that one can determine if an event is accidental based solely on whether the event is unexpected. The court held that consideration must also be given to the ordinary meaning of the term "accident", which has been defined as an "unlooked for mishap or untoward event which is not expected or designed". The court agreed that the transverse myelitis, which led to the paralysis, "arose from an external factor or "unlooked for mishap" - the introduction of the HSV-2 virus into his body by a sexual partner. Therefore the paraplegia was held to have been caused by accidental means within the meaning of the policy.

Decision Overturned By Supreme Court of Canada - Paralysis unexpected but the result of a disease in the ordinary course of events and therefore Not accidental

The insurer sought and obtained leave to appeal. The Supreme Court of Canada agreed with the Court of Appeal and held that the determination of whether a bodily injury results from an accident cannot be established solely based on the expectation test. The court agreed that the word accident should be interpreted in "ordinary language" as the average person would understand it. Accordingly, in order for an injury to be caused through accidental means, there must be an unlooked for mishap, which caused the unexpected injury.

In this regard, the court stated that if the sole test were the expectation test, then "every bad happening, natural or unnatural, whether caused by disease in the ordinary course of events or otherwise, would be classified as an accident". To illustrate this point, the court provided the example of an insured sitting on a couch in front of her television set when suddenly she suffers from a stroke and dies. While the stroke and resulting death was totally unexpected, there is no accident involved in the ordinary sense of the word.

The court also acknowledged that while the word accident would not typically include a disease arising from natural causes, it may include a disease which does not arise in the normal course of events. Accordingly, the court stated that Gibbens' claim is not barred simply because his paraplegia was caused by a disease. The court held that the onus is on the insured to establish that his paralysis was caused by an "unlooked for mishap".

The court examined the chain of events which led to Gibbens' paralysis, namely sexual intercourse, which resulted in the transmission of genital herpes that led to transverse myelitis. While the transmission of genital herpes involved the participation of an outside sexual partner, the normal method of transmitting genital herpes is through sexual intercourse. The court acknowledged that while transverse myelitis is an unexpected consequence of genital herpes, it does "occur (though rarely) as a normal incident or consequence of that disease".

Based on the foregoing, the court concluded that the acquisition of genital herpes by Gibbens, which ultimately led to the transverse myelitis and paraplegia, was not an "accident" since the herpes was acquired in the "ordinary way" absent any mishap or trauma. Accordingly, the court held that the "so-called accident was simply the inception of the disease in the ordinary course of events". On the basis of this finding, the court allowed the appeal and dismissed Gibbens' claim against the insurer.

Insurer Estopped From Denying Coverage
By: Joni J. Funk , Calgary

The Supreme Court of Canada recently dismissed an application for leave to appeal in a coverage dispute in Wawanesa Mutual Insurance Company v. Buck .

Facts

On June 25, 2000, Logel was driving her vehicle with Gill as a passenger when they were involved in a single vehicle accident. Logel's vehicle was insured under a policy of automobile insurance. Logel died as a result of the accident, and Gill was severely injured. Gill commenced a claim against Logel's estate for the injuries he sustained in the accident. The value of Gill's damages exceeded the statutory minimum of $200,000.

Regulation 777/93, pursuant to the Ontario Insurance Act, outlines the statutory conditions pertaining to automobile insurance. Statutory condition 4(1) states:

Section 6 of Regulation 340/94, pursuant to the Ontario Highway Traffic Act, provides that one of the conditions of a G2 driver's license is that the driver's blood alcohol concentration must be zero at all times while driving.

Section 258(11) of the Ontario Insurance Act provides that the insurer may avail itself of any defence it is entitled to set up against the insured once coverage exceeds the statutory minimum of $200,000.

The insurer had a copy of the police report by August 16, 2000. The report listed Logel as a G2 driver. On September 6, 2000, Gill filed his Statement of Claim. By January 28, 2002, the insurer's counsel was aware that Logel had a measurable serum alcohol level at the time of the accident. The Statement of Defence was filed on July 17, 2002. By August 2005, the case had progressed through discoveries.

Applications for Declarations pertaining to Coverage

Both Logel's Estate and the insurer brought applications seeking declarations pertaining to the coverage issues. Lack, J. heard the applications and issued an oral decision addressing the following issues:

1. Did Logel breach the statutory conditions of her insurance policy by violating a regulation made under the Ontario Highway Traffic Act that a G2 license holder must have a zero blood alcohol concentration while driving and therefore statutory limits are reduced from $1,000,000 to the minimum statutory limit of $200,000?
2. Did the insurer waive the breach of the statutory condition or alternatively, is the insurer deemed to have made an election thereby precluding its position that the breach limits liability to the statutory minimum?

The Estate submitted that by taking the steps in the litigation that it did, the insurer elected not to rely on the policy breach, or alternatively waived the policy breach and was estopped from relying upon the breach.

The insurer submitted that its claims examiner and legal counsel never directed their minds to the issue of a policy breach until 2005, when the lawyer's clerk reported on the results of a driver record search to determine what type of license Logel had at the time of the accident. The insurer submitted that unless the claims examiner and its legal counsel actually directed their minds to the issue and made a conscious decision to elect not to raise the defence, the insurer had not waived this defence.

The Estate argued that the insurer's claims examiner and legal counsel had the police report in their possession and the underwriting department would also have record of Logel's G2 license. When the pathology report demonstrating the presence of alcohol in Logel's blood became available in January 2002, the insurer had all the information necessary to determine whether there had been a policy breach. The fact that the claims examiner and legal counsel did not turn their minds to the policy breach did not prevent the insurer from being bound by its election to defend the insured without raising this coverage issue.

Justice Lack considered Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490, where the Supreme Court of Canada quoted Federal Business Development Bank v. Steinbock Development Corp. (1983), 42 A.R. 231 (C.A.):

Justice Lack also considered Rosenblood Estate v. Law Society of Upper Canada (1992), 37 C.C.L.I. 142 (Ont. C.A.), where the court stated that when a claim is presented to the insurer, the facts should be investigated promptly. The insurer should inform the insured as soon as possible if there is no coverage and the insurer should cease to deal with the claim. If coverage is questionable, the insurer should obtain a non-waiver agreement. If the insurer waits too long, it will be precluded from taking an off-coverage position.

In the case of waiver, the applicant did not have to prove prejudice. However, the court in Rosenblood stated that prejudice is presumed where the insurer persisted in the defence through productions and discovery and into settlement negotiations.

Justice Lack determined that although Logel had breached the statutory condition, the insurer had waived that breach because it should have appreciated the significance of the facts surrounding the policy breach when it became aware that Logel had alcohol in her blood, and as a holder of a Class G2 driver's license, was not authorized by law to drive. As a result, Lack, J. issued an order declaring that the insurer had waived Logel's breach of the statutory condition and was precluded from relying on the breach of the statutory condition to limit its liability to the statutory minimum limit.

Ontario Court of Appeal

The insurer appealed on the basis that Lack, J. erred in finding waiver based on the determination that the insurer and its legal counsel should have appreciated the significance of the facts surrounding Logel's policy breach. The insurer argued that a conscious intention to abandon its rights under the policy is required to establish waiver of a policy breach. In addition, the insurer asserted that Justice Lack erred in presuming prejudice to the Estate resulting from the insurer's delay in relying on the breach.

The Ontario Court of Appeal rejected the insurer's submissions and found that Lack, J. properly determined that the insurer demonstrated by its conduct over a 3 ½ year period that it did not intend to rely on Logel's policy breach. The Court of Appeal agreed with the ruling in Rosenblood that an insurer will be precluded from taking an off-coverage position if the insurer waits too long to invoke its right to rely on a policy breach. Leave to appeal to the Supreme Court of Canada was denied.

Summary

Logel demonstrates that courts will not uphold an insurer's ability to rely on a policy breach if the insurer and its legal counsel have not diligently investigated the circumstances of the claim and promptly informed the insured that the insurer will be relying on the policy breach to support an off-coverage position.

It is imperative that an insurer and its legal counsel immediately examine and investigate the facts surrounding a claim in order to determine if there has been a policy breach. The insurer should inform the insured as soon as possible if the insurer intends to maintain an off-coverage position. If the status of whether there has been a policy breach is in question, the insurer ought to obtain a non-waiver agreement.

Footnotes

<sup>1. LINDSAY, Hugh, 20 Questions Directors Should Ask About Risk, Second Edition, Canadian Institute of Chartered Accountants, 2006.
2. LINDSAY, Hugh, 20 Questions Directors Should Ask About Risk, Second Edition, Canadian Institute of Chartered Accountants, 2006.</sup>

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.