When an insured is involved in a motor vehicle accident, they are able to pursue accident benefits from the insurer where their policy lies. However, sometimes a situation occurs where the individual is not specifically insured. So the question becomes: whose policy responds to a claim for accident benefits?
Consider the following example. An individual, who does not have their own car insurance, was a passenger in a vehicle owned and insured by a friend, and that vehicle was involved in an accident. If the individual sustains injuries from the accident and wants to make a claim for accident benefits, is the claim the responsibility of the insurer of the car or the responsibility of the insurer of the person whom the individual may be principally dependent on (i.e. a parent)?
Based on the above example, a priority dispute may occur between the insurer of the car and the insurance company of the person on which the individual is believed to be principally dependent. If the individual is found to be principally dependent on that other person, then that insurance company may be held accountable for any claims put forth, not the third party involved in the incident. In cases of serious or catastrophic injuries this could amount to large dollar amounts claimed for medical rehabilitation expenses, attendant care etc. and therefore the insurers will have a priority dispute.
The legislation states “For the purpose of this Regulation, a person is a dependent of an individual if the person is principally dependent for financial support or care on the individual or the individual’s spouse” (Subsection 7(b)).
In the determination or measurement of an individual’s financial dependency, many issues may arise pertaining to the availability of the necessary financial documentation and the assumptions to be made may be encountered. Accordingly, common law has resulted in rules of thumb that are followed in the determination of financial dependency.
How to Determine/Measure Financial Dependency
The Miller v Safeco Insurance Co of America case stipulates the following criteria should be considered:
- The amount and duration of the financial dependency (i.e. how long has the insured been financially dependent and to what extent);
- The financial or other needs of the insured (i.e. is the insured only financially dependent or do they depend on the other person for other needs such as transportation, cooking, everyday assistance); and,
- The ability of the insured to be self-supporting (ie. could the insured live financially independent of the other person and financially support themselves).
The fourth criteria put forward, the “general standard of living within the family unit”, was excluded as a valid criterion on appeal.
Periods of Analysis
The arbitration between Federation Insurance Company of Canada and Liberty Mutual Insurance Company, March 4, 1999, states that “relationships change from time to time, perhaps suddenly. Transient changes may alter matters for a short period, but not change the general nature of a relationship. A momentary snapshot would not yield any useful information about these time-dependent relationships…choosing the appropriate time frame could be critical. The evaluation should be made by examining a period of time which fairly reflects the status of the parties at the time of the accident”.
This arbitration was appealed and the conclusion was upheld by Justice O’Leary on April 10, 2000. Therefore, in order to measure an insured’s financial dependency on another person, it is important to consider a number of time periods in the analysis, if warranted.
For example, if the insured worked part-time and only commenced a full-time employment position during the 3 months prior to the loss, assessing the 12 months prior to the loss would not result in an accurate representation of the insured’s financial position at the date of loss, as 9 out of the 12 months the insured was earning part-time income. Measuring the financial dependency on the 3 and 6 months in addition to the 12 months would show how the insured’s financial dependency position changed leading up to and at the date of loss.
The arbitration between Federation Insurance Company of Canada and Liberty Mutual Insurance Company, March 4, 1999, heard by Justice O’Brien, considered that one could “only be considered principally dependent for financial support on someone else if the cost of meeting…needs is more than twice…resources”.
Therefore the 51% test set forward by Justice O’Brien has become the precedent when assessing an individual’s financial dependency.
Accordingly, for an insured to be considered principally dependent on another person, their income from all sources must be less than 51% of their personal expenses. Specifically, the test ensures that if the insured cannot meet 51% of their personal expenses based on their income level, the insured is financially dependent on another individual.
Once the time periods that will be assessed are determined, total income earned during those periods must be determined. This will include all sources of earned income (employment income and self-employment income).
The following documentation can be obtained to assist in calculating total income earned in the applicable periods:
- Income Tax Returns
- Records of Employment
- T4-Statements of Remuneration Paid
- Pay Stubs, Cheques (front and back)
As in any situation where self-employment income is earned in cash, issues arise pertaining to supporting documentation and substantiating the amount earned. Potential documentation to support self-employment cash revenue includes:
- Business Bank Statements.
Pension / Old Age Security Benefits
If the insured is receiving pension income or old age security benefits, the amount received would be considered as an increase in the financial means of the individual, and therefore would be considered as income in the analysis.
An insured may be providing a service to a family member in exchange for shelter etc. versus monetary compensation. An example of this would be a grandparent who provides childcare services for his grandchildren. The insured’s child would otherwise have to pay out of pocket for a childcare provider, and instead of paying the insured for the services, they live with them and cover expenses. Accordingly, a monetary value would be associated with the contribution.
Issues that arise with contributing a monetary value to these contributions can include the following:
- Weekly hours – how many hours per child did the insured provide childcare services for (may be different per child based on ages etc.).
- Responsibilities – time spent for normal “play time” or normal “relationship time” (i.e. taking the children to the park with the parents) should not be considered in the calculation.
- Hourly rate – this can be determined from research for the average hourly rate that would be incurred for a childcare provider in the area.
Net Income or Gross Income
If gross income is utilized, before income taxes payable and source deductions, then the foregoing applicable amounts must be considered as an expense incurred within the analysis. The amounts must be considered as the deductions are mandatory and the gross income earned is not the true disposable income available to the insured to spend on the necessary expenses.
Another approach is to utilize the insured’s net income, after income taxes payable and source deductions versus including the amounts as an expense.
The insured’s expenses incurred and actually paid in the current situation are determined for the applicable periods. An insured’s expenses may be difficult to determine as expenses vary substantially from person to person and month to month.
Many people do not keep track of their regular expenses and are unaware of all the types of expenses incurred. Therefore, obtaining the appropriate supporting documentation poses a challenge.
Common expenses that should be considered include the following:
- Food (groceries and restaurants)
- Household Operation
- Transportation (car payments, fuel, insurance, bus tickets etc.)
- Health Care
- Personal Care
- Tobacco Products and Alcoholic Beverages
- Games of Chance (casinos, lottery tickets)
- Personal Taxes (if income is based on gross income)
- Gifts of Money and Contributions
- Contributions to household
- Pet Expenses (vet bills, food)
- Loan payments
The following are types of documentation that may assist in the analysis:
- Statements: statements from the insured and family members can state amounts or estimated amounts for expenses paid by the insured.
- Examination for Discovery: can provide more details on what the insured spends their money on and any contributions given to the household.
- Receipts: usually for larger items. For example, a receipt for the purchase of car will allow us to confirm there is a vehicle and the time period when it was purchased. This is also an indicator that additional expenses such as insurance, fuel, maintenance and repairs would be incurred.
- Bank Statements: bank statements for the insured and the applicable family members can provide details pertaining to incoming and outgoing amounts. For example, bank statements would show debit amounts at gas stations (gas expense), restaurants (food expense), insurance company (car insurance expense), movie theatre/bars (entertainment), and grocery stores (food expense).
- Credit Card Statements: credit card statements for the insured and the applicable family members can provide details pertaining to outgoing amounts, including gas stations (gas expense), restaurants (food expense), movie theatre/bars (entertainment), clothing stores (clothing expense) and grocery stores (food expense).
- Statistics Canada: when documentation pertaining to expenses is not available, Statistics Canada – Spending Patterns in Canada provides average annual expenses for a one-person household. Please note that as statistics are based on an average, this should only be utilized when no other documentation is available.
Additional Expenses Incurred to Live Independently
In the analysis of the insured’s ability to live independently, the additional expenses that would be necessary are added to current expenses to measure whether the insured meets the 51% test to live on their own. Examples of additional expenses include: food, shelter/rent, household operation, and household furnishing.
Please note that if the individual was paying an amount towards any of the aforementioned expenses in their current situation as at the date of loss, then an adjustment would be made (ie. if they were to live independently, they would pay rent for their own place instead of contributing to rent of their family member’s place).
As the expenses that are included in this scenario are not actual expenses incurred, but are hypothetical, additional research is required. It is important to keep in mind the individual’s situation and determine a place of residence suitable based on the geographic location. For example, for an individual who lives in Brampton with no pets, one would look at the average price/rent of a bachelor and one bedroom apartment during the year of the loss.
If the percentage of expense to income is 51% or greater, then it may be determined that the insured is financially independent. If the percentage of expenses to income is less than 51%, then it may be determined that the insured is financially dependent.
The following are misconceptions and other issues that warrant considerations:
- Non-monetary contributions to the household. The insured may contribute to the household chores in place of paying rent. For example, laundry, shoveling of snow, taking out the garbage, mowing the lawn etc. Although these chores are provided, as the insured would also receive benefit from “chores” completed by other members living in the same household, and as the insured would have to do the above mentioned chores if they were to live independently, it may not be appropriate to assign a monetary value.
- Age does not matter. There is not a specific age that determines whether someone is financially dependent on another person. However, as one’s ability and capacity to earn income does vary with age, it can be an indicator.
- An individual may be financially dependent on more than one person. The 51% test pertains to being dependent on one individual and not multiple.
- The person the individual may be financially dependent upon does not have be a relative or family member. It may include friends, girlfriend/boyfriends, family friends, etc.
Determining whether someone is financially dependent on another person is not a straightforward analysis or mathematical measurement. Numerous issues pertaining to obtaining the appropriate documentation, determining reasonable amounts for expenses, and evaluating the proper time frames can arise. As the outcome holds one insurance company responsible for any claim put forth, the importance of an accurate representation of the individual’s dependency is of extreme importance.
If you require further information or assistance or have any questions relating to this article or questions about financial dependency, please call MDD Forensic Accountants.
By Hannah McCannell. Published in Without Prejudice (WP) – November 2012 issue.