Improvident and Bad Faith Settlements

April 29, 2022

The word “improvident” is defined as “neglecting to provide for future needs” [2] as well “lacking foresight, incautious, unwary…” [3] Prior to Bill 59, the term “improvident settlement” was used in the context of accident benefits settlements and obviously was something to be avoided at all costs. Yes, you could lump out an accident benefits file, but to do so you had to avoid the risk of the settlement being labeled improvident. What the courts used to interpret improvident settlement was basically a test of whether or not the settlement was reasonable. [4]

The good news is that the current standard is that of a “bad faith” settlement and this standard is clearly lower.

This paper is intended to provide an overview of how improvident settlement was defined in the past in the context of accident benefits, and how bad faith settlement is being defined currently. In addition, the authors hope to offer some guidance on how to settle an accident benefits file in a manner that will avoid any suggestion of bad faith or negligence by the lawyer, law clerk, or paralegal working on behalf of a client to achieve a full and final accident benefits settlement. [5]

The current law

The concept of “bad faith settlement” can be found in s.267.8(22) of the Insurance Act. [6] This subsection was intended to aid in the interpretation of the entire section on collateral benefits and therefore cannot be understood without looking at the entirety of s.267.8.

Collateral benefits – income loss and loss of earning capacity

Section 267.8 (1) of the Insurance Act gives the tort defendant in a motor vehicle action a deduction for all payments that the plaintiff received or that were available for accident benefits relating to income loss and earning capacity. Section267.8(1) states:

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. All payments in respect of the incident that the plaintiff has received before the trial of the action under a sick leave plan arising by reason of the plaintiff’s occupation or employment. 1996, c. 21, s. 29.

Collateral benefits – health care expenses

Section 267.8 (4) of the Insurance Act gives the tort defendant in a motor vehicle action a deduction for all payments that the plaintiff received or that were available for accident benefits in respect of health care expenses. Section 267.8(4) states:

(4) 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 expenses that have been incurred or will be incurred for health care 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 expenses for health care.

2. All payments in respect of the incident that the plaintiff has received before the trial of the action under any medical, surgical, dental, hospitalization, rehabilitation or long-term care plan or law. 1996, c. 21, s. 29.

Collateral benefits – other pecuniary loss

Section 267.8(6) of the Insurance Act gives the tort defendant in a motor vehicle action a deduction for other accident benefits in respect of pecuniary loss. Section 267.8(6) states:

(6) 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 pecuniary loss, other than the damages for income loss or loss of earning capacity and the damages for expenses that have been incurred or will be incurred for health care, 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 pecuniary loss, other than income loss, loss of earning capacity and expenses for health care.

Bad faith settlement in the context of section 267.8 – section 267.8(22)©

Section 267.8 (21) of the Insurance Act also tells us that for the purposes of the above subsections, ie. (1), (4), and (6), all that a plaintiff must do is apply for the benefit and then if it is denied by the accident benefits insurer it is considered not available.7 There is no requirement on the plaintiff to file for mediation or pursue the matter further by filing for arbitration or issuing a claim.

As stated in s. 267.8(21):

(21) For the purpose of subsection (1), (4) or (6), a payment shall be deemed not to be available to a plaintiff if the plaintiff made an application for the payment and the application was denied.

The wording of the exception can be found in s.267.8(22). Section 267.8(22) of the Insurance Act states:

(22) Subsection (21) does not apply if the court is satisfied that the plaintiff impaired his or her entitlement to the payment by, (a) failing to give any notice required by law of the application for the payment; (b) failing to make himself or herself reasonably available for any examination that was requested by the person to whom the application was made and that was required by law; or (c) settling in bad faith his or her entitlement to the payment to the detriment of a person found liable for damages in the action for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of the automobile. 1996, c. 21, s. 29. [emphasis added] Therefore, while generally, applying for an accident benefit and being denied an accident benefit is enough to satisfy the legislation, one must still be cautious that a plaintiff did not settle in bad faith any entitlement to an accident benefit or a disability benefit or any other legal benefit entitlement.

How have the courts historically interpreted “improvident settlement”?

In the 1996 case of Collee v. Kyriacou, [8] the defendants sought a deduction for a weekly income benefit from damages for lost income and argued that the plaintiff had improvidently released his accident benefits insurer, Allstate. Justice Quinn found that while Mr. CoIlee was well-intentioned in embarking on self-employment as a worm farmer, the test was not one of sincerity but one of reasonableness. He stated at paragraph 15 of his decision:

“The test is, instead, one of reasonableness and, more than that, reasonableness objectively viewed. Furthermore, it is not simply a question of whether it was reasonable, in the circumstances, for Mr. CoIlee to have undertaken the business of worm farming. What also must be considered is whether it was reasonable for him to have settled with Allstate as he did.”

In his decision, Justice Quinn referenced the case of Orchover v. Wright [9] in which Justice Forget stated that it is the defendant who is to benefit from the availability of other insurance, not the plaintiff, and if the plaintiff makes an improvident settlement with its own no-fault insurer, that fact should not be visited upon the defendant.

In the end, Justice Quinn concluded that Mr. CoIlee’s decision to settle with Allstate was unreasonable and therefore improvident and allowed the defendants a deduction of $600 per week.

How has “settling in bad faith” been interpreted?

In the 2001 case of Morrison v. Gravina, the defendants, following a jury trial, sought to reduce the plaintiff’s past loss of income award by alleging that the plaintiff had entered into an improvident settlement that precluded her from non-earner benefits that the defendants wanted a deduction for. Justice Greer held that improvident settlement and bad faith settlement are not one and the same.

The term “bad faith” implies the conscious doing of a wrong or dishonest act. It also implies a state of mind “affirmatively operating with ill will or an improper or illegal design.” [10] Justice Greer further noted that bad faith is not bad judgment. It is not the same as negligence. Bad faith involves intent.

In the end, Justice Greer held that the onus was on the defendants to prove bad faith and they had failed to do so. There was an absence of evidence to show that the plaintiff had acted in bad faith in settling her accident benefits.

In the 2005 case of Peloso v. 778561 Ontario Inc., [11] Justice Aiken also considered the definition of “bad faith” and how it compares to “improvident settlement.” At paragraph 426 of this case, Justice Aiken states:

“Subsection 267.8 (22)(c) makes no reference to the concept of improvident settlement. Presumably if an improvident settlement by the plaintiff were to have the same impact on the parties as a settlement the plaintiff entered in bad faith, the legislation would have indicated that. By referring to bad faith settlements, but omitting any reference to improvident settlements, the legislature must have intended to make it harder under Bill 59 than it had been under OMPP for defendants to challenge settlements entered by plaintiffs with their own accident benefits providers.”

In the end, Justice Aiken held that even if he is wrong about the definition of bad faith, the accident benefits settlement in this case was reasonable and not improvident in any event.

Thus, we can conclude from the case law that defendants in motor vehicle tort cases will have a harder time proving that an accident benefits settlement was entered into in bad faith. The law is also clear on the fact that the onus is on the defendant to prove the plaintiff settled in bad faith.

Settling accident benefits while avoiding a claim of Bad Faith Settlement [12]

If your client is interested in settling his or her accident benefits on a full and final basis, how do you go about achieving this and avoid any suggestion that the settlement was made in bad faith?

The first thing to consider is timing. Obviously, the legislation forbids any settlement until at least one year post-accident. However, a further consideration is whether the file is ripe for settlement. Is your client medically stable or is there at a minimum a reasonable long term prognosis that is capable of providing enough information to make longer term predictions of what the future holds for the client’s future needs?

You must also consider the maximum entitlements available for your client and what remains unused of the limits for each category of accident benefits. Generally, the following is a brief summary of the “to dos” in preparing a file towards a full and final accident benefits settlement

Make sure you have obtained a complete copy of the entire Accident Benefits file.
Also obtain from the accident benefits insurer a summary of all benefits paid to date. From that you can determine how much your client has used in each category. The past is often a good predictor of the future needs.
Prepare a list of denials based on the accident benefit file and the summary of benefits.
Check with your client to see if there are any other outstanding expenses.
Check to make sure that your client has not agreed to any deferred payments and that there are no outstanding protected accounts from treatment providers. If there are, be sure to obtain the complete details.
Review all expert reports, all insurance examination reports, all reports by doctors, treatment providers, occupational therapists, etc. Carefully review all recommendations and cost out any recommendations that have been made but not paid for to date. (Unless any recommendations have become irrelevant or moot to your client’s situation.)
If there are significant ongoing needs for medical and rehabilitation treatment, a future care costs analysis will assist in costing out the future recommended needs.
Review the current therapy that is being provided to the client. Using the current rates, cost out ongoing therapy that is reasonable based on the background reports and the facts of your client’s situation. Generally, you may be looking at a further 2 to 5 years of ongoing therapy, or if you are getting close to the 10-year mark you should cost out the therapy to the 10-year mark. There should be a progressive scaling down in the frequency of the therapy as time progresses closer to the 10-year mark. You should use the rates for therapy that are indicated on the most recent treatment plans that were submitted by treatment providers.
Cost out outstanding and future income replacement benefits, caregiver benefits or non-earner and any other accident benefit benefits and interest where applicable and relevant to the facts of your client’s situation. If future income replacement benefits are only intended for a certain period of time, what is the plan in terms of returning to the workforce? Has there been provisions made for vocational assessment, retraining and education and have these items been identified and reviewed for costing as well?
Speak to your client to find out if there are any other accident benefit needs that he or she feels has been missed in the reports or that were recommended but there was not a complete follow up. Are there any other reasonable medical or rehabilitation items that your client feels he or she would benefit from? Are there any other outstanding approved items or treatment that has not been fulfilled but have fallen through the cracks?
Once you have done the cost out with respect to the above, you now have the information necessary to prepare a comprehensive memo summarizing the client’s outstanding past and future accident benefits needs and this can provide a starting point for settlement discussions. Generally, this memo should be in place and up to date prior to any FSCO mediation

Attached to this paper as an appendix is a sample memo illustrating the above for general reference.

Conclusion

To quote Justice Forget at paragraph 18 of his 1996 decision in Orchover v. Wright:

However, I do not wish to be taken to say that there is anything sinister about a cash-out. There may be very valid reasons for doing so. But those recipients who are so inclined should realize that they are voluntarily assuming a risk which may eventually be decided to their detriment.

It is our job to ensure that our clients understand the risk involved in settling their accident benefits and in doing so we must make every effort to minimize that risk by ensuring that every aspect of potential exposure is reviewed and considered.

However, the reality in 2012 is quite different to that of the legal picture in 1996. We no longer need to be certain that each accident benefits settlement will be judged as a reasonable one under an objective lens, we only need to be sure that it was not entered into in “bad faith” and that benefits were in fact applied for and denied.

Appendix

Sample Memo

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[1] When discussing “bad faith” settlement in the accident benefits context, there are two separate considerations. One is whether the accident benefits adjuster acted in bad faith and the other is whether the insured person acted in bad faith in settling their accident benefits claim to the detriment of the tort defendant. This paper only addresses the latter.

[2] Random House Webster’s College Dictionary, 1991, s.v. “improvident.”

[3] Dictionary.com, s.v. “improvident.”

[4] Colee v. Kyriacou (1996), 31 O.R. (3d) 558 (Gen. Div.).

[5] The authors gratefully acknowledge the insight provided by Neil Wheeler in his OTLA 2002 Spring Conference paper entitled, “Settling The Bill 59 Accident Benefits Claim: The Good, The Bad Faith and The Ugly,” and recommend this paper for those interested in an more comprehensive analysis of accident benefit settlements.

[6] Insurance Act, R.S.O. 1990, c.I.8 as am.

[7] See Sutherland v. Singh, [2011] O.J. No. 2901, a recent decision of the Ontario Court of Appeal. In this case, the Court of Appeal overturned the motion judge’s decision and held that once a person elects care giver benefits, income replacement benefits are no longer available and therefore the defendant in the Sutherland case could not have a deduction for income replacement benefits that were never in fact received.

[8] 31 O.R. (3d) 558.

[9] (1996), 28 O.R. (3d) 263 (Gen. Div.).

[10] Morrison v. Gravina (2001), 29 C.C.L.I. (3d) 129 (Ont. S.C.J.).

[11] Peloso v. 778561 Ontario Inc. (cob. J.L. Maintenance Services), [2005] O.J. No. 2489 (S.C.J.).

[12] The authors graciously acknowledge the contribution of Lee-Ann Fournier, a senior law clerk at Rastin Gluckstein Lawyers, for her insight and wisdom with respect to this section of the paper.