The weapon of "bad faith" has spread across America through consumer advocacy groups and the Internet. Plaintiffs' lawyers advertise that in the case of a dispute with an insurer it is better to sue than negotiate, promising considerable amounts available in punitive damages.
There is usually a genuine desire on the part of the claims handler to reach a fair and expedient resolution. Sometimes there is a communications problem or a failure to provide basic information necessary for the final resolution of the claim. Other times there are valid reasons for suspicion about the claim that must be investigated. The insurance industry is not perfect. Mistakes and delays occur. Sometimes, unfortunately, claims are denied when they would not have been had the insurer been acting fairly.
What has separated the U.S. and Canadian experience are the frequency and quantum of punitive damage awards. Canadian courts have rarely awarded punitive damages against insurers. However, that all changed in January 1996 when an Ontario jury returned with a verdict of $1 million in punitive damages against Pilot Insurance (see Whiten v. Pilot Insurance Co  O.J. No. 227).
The insurance industry suddenly had to come to grips with the possibility that they would, in future, face American style punitive damage awards. There was a collective sigh of relief, therefore, when the Court of Appeal for Ontario, by a 2-1 majority, reduced the punitive damage award from $1 million to $100,000 in a decision reported at (1999), 42 O.R. (3d) 641 (C.A.) That relief may be short-lived however. On October 14, 1999 the Supreme Court of Canada granted leave to appeal ( S.C.C.A. No. 157).
In this article we briefly summarize the legal principles applicable to punitive damage awards in the context of first-party claims against insurers.
Punitive versus compensation
The general rule is that damages are awarded to compensate a plaintiff for their loss. Punitive damages, however, are different. They are awarded not to compensate the plaintiff, but to punish the defendant and deter the defendant and others from acting in that manner in the future. Essentially, punitive damages are akin to a civil fine, paid as a windfall to the plaintiff (see generally Hill v. Church of Scientology,  2 S.C.R. 1130 at 1208).
In breach of contract cases, there are two requirements for an award of punitive damages. First, the defendant must have committed an independent or separate actionable wrong. Second, the conduct of the defendant must be of a type usually described as "harsh", "vindictive", "reprehensible", "high-handed", "oppressive" and "malicious" -- actions for indemnity under an insurance policy are founded on breach of contract.
Independent Actionable Wrong
The first requirement of an "independent actionable wrong" is perhaps the more difficult to understand. The leading case is the Supreme Court of Canada judgment in Vorvis v. Insurance Corp. of British Columbia, (1989) 58 D.L.R. (4th) 193 where McIntyre J., writing for the majority, said: "When then can punitive damages be awarded? It must never be forgotten that when awarded by a judge or a jury, a punishment is imposed upon a person by a court by the operation of the judicial process. What is it that is punished? It surely cannot be merely conduct of which the court disapproves, however strongly the judge may feel. Punishment may not be imposed in a civilized community without a justification in law. The only basis for the imposition of such punishment must be a finding of the commission of an actionable wrong which caused the injury complained of by the plaintiff."
Although the requirement of an independent actionable wrong has consistently been applied by Canadian courts, it is not easy to explain what it is. In the context of first-party claims, the insurer has failed to pay when it ought to have done so under the contract, for example, a breach of contract. The independent actionable wrong cannot be the malicious conduct because that is the second requirement for an award of punitive damages.
Sometimes, an independent actionable wrong will be easy to identify. For example, if an insurer refuses to pay disability benefits and in a public manner proclaims the insured to be a fraud, then the insurer may have defamed the insured or injured their reputation, torts which are separate from the breach of contract. In the majority of cases, however, the insurer will have committed no recognized separate tort.
The Duty of Good Faith
Insurance contracts are defined by the principle of utmost good faith, although the law is quite clear that insurers and insureds do not stand in a fiduciary relationship (see Plaza Fiberglass Manufacturing Ltd. v. Cardinal Insurance Co. (1994), 18 O.R. (3d) 663 (C.A.). What then is the duty of the insurer in responding to a claim?
The answer seems to be that the insurer has an implied duty to act fairly and in good faith. Most insurance contracts are silent with regard to this duty, however, the Insurance Act - R..S.O 1990, c. I.8 -- sets out certain obligations on the part of the insurer following a loss.
Laskin J.A., speaking for the Court of Appeal in Whiten, stated that the insurer "holds a position of power over an insured, conversely, the insured is in a vulnerable position, entirely dependent on the insurer when a loss occurs. For these reasons, in every insurance contract an insurer has an implied obligation to deal with the claims of its insureds in good faith." Unfortunately, "acting fairly" and "in good faith" cannot be defined with any precision. We suggest promptness, courtesy, professionalism and objectivity. Denying a valid claim to effect a more favorable settlement, ("starving out an insured") will attract severe judicial displeasure.
The Court of Appeal for Ontario in Whiten held that breach of good faith is an independent actionable wrong within the strictures of Vorvis. The Court (speaking through Laskin J.A. on this issue) said the following: "That obligation to act in good faith is separate from the insurer(s) obligation to compensate its insured for a loss covered by the policy. An action for dealing with an insurance claim in bad faith is different from an action on the policy for damages for the insured loss. In other words, breach of an insurer(s) obligation to act in good faith is a separate or independent wrong from the wrong for which compensation is paid."
An interesting question is whether the duty of good faith arises as an implied term of the insurance contract or as a common law duty in tort. On this point, the Court in Whiten said: "If Vorvis makes it necessary...I would be prepared to hold that an insured has a duty in tort of good faith towards its insureds...A strong argument can be made for finding that the relationship between insurer and insured is of sufficient proximity to give rise to a concurrent duty in tort alongside the insurer(s) contractual obligation to act in good faith."
An application by the insurer for leave to cross-appeal on this issue was also granted by the Supreme Court of Canada on October 14, 1999. If the Court of Appeal for Ontario is correct on this issue, the focus of inquiry will be on malicious conduct. An insurer who has acted maliciously will obviously not have acted in good faith.
How bad is conduct that warrants an award of punitive damages? The most common descriptions are: "malicious", "harsh", "vindictive", "reprehensible", "high-handed" and "oppressive". In the Whiten case, the Court summarized the insurer(s) conduct as follows: "In summary, the evidence overwhelmingly shows that Pilot handled the Whiten claim unfairly and in bad faith, that it deliberately ignored any opinion, even of its own adjuster and its own experts, that would oblige it to comply with its contractual obligations to pay the claim, and, that it abused its financial position and contrived an arson defense to avoid payment of the claim or, at least, to force a significant compromise".
Whether the insurer(s) conduct is "bad enough" will be fact-specific, although the conduct must go beyond merely "acting unfairly".
Where to with awards
Until Whiten, awards against insurers in Canada for bad faith handling of insurance claims were in the range of $7,500 to $15,000. The jury in Whiten awarded $1 million. The Court of Appeal, by a 2-1 majority, reduced the award by 90% to $100,000. Laskin J.A. dissented on the issue of quantum, and would have left the award at $1 million. At this point it is uncertain what the Supreme Court of Canada will do. However, The most important consideration in arriving at the amount of the punitive damage award is the conduct itself. The more reprehensible the conduct the greater the award. This requires the subjective task of assessing degrees of reprehensibility. Another important factor is the wealth of the defendant. In some of the U.S. cases where awards of punitive damages have been exceedingly high, corporate profitability has been a crucial factor. There have been some large punitive damages awards in Canada, albeit not against insurers. In the past ten years, there have been four awards of $1,000,000 or more, one of $800,000, one of $750,000, one of $500,000, and eight others of $100,000 or more. A number of these awards were reduced or vacated on appeal. Judges often say that the purpose of punitive damages is to punish and deter, although the goals of punishment and deterrence are neither identical nor necessarily compatible. Punishment is based on retribution. It looks backwards at the conduct and leads to an award proportionate to the gravity of the act. Deterrence, on the other hand, is forward looking. It seeks to influence the behavior of all potential actors, not just this particular defendant. It has been suggested that the deterrence measure of damages will frequently be greater than the punitive. Many of the crucial issues in relation to punitive damages against insurers will be cleared up by the Supreme Court of Canada in the Whiten case. As the law now stands, however, bad faith is the springboard for what can be a very substantial award indeed. cu