Class Actions: Dawn of a New Era

Insurers are too quick to settle cases and may therefore become easy marks for an increasingly aggressive, sophisticated and educated plaintiff bar, according to John Campion, defence counsel in the so-called “salvage case,” Pauli v. ACE INA Insurance.

In Pauli, Alberta’s Court of the Queen’s Bench in 2003 determined that in situations in which a vehicle is damaged beyond repair, and an insurer elects to take title to the salvage, the insurer is entitled to reduce its payment to the insured by the amount of the deductible set out in the policy.

The Ontario Court of Appeal in 2001 came to the opposite conclusion in McNaughton Automotive Ltd. v. Co-operators General Insurance Company. But in an extremely rare situation, a five-member panel of judges in the Ontario Court of Appeal reversed the court’s McNaughton decision in the 2005 case, David Polowin Real Estate Ltd. v. Dominion of Canada General Insurance Company.

The lesson learned from Polowin, said Campion of Fasken Martineau, a board member at the Law Society of Upper Canada, is that “the idea of moving quickly into settlement, in my respectful view, is just completely wrong-headed.”

Campion was speaking to an audience of insurers, brokers and claims professionals attending the September 2007 inaugural National Insurance Conference of Canada (NICC) meeting in Montreal. “The way in which plaintiffs’ counsel look at these actions does not make it easy to settle until [plaintiffs’ counsel] feel the cold steel against their ribs of real war,” Campion said. “There is a need for strong, innovative defences in a very sophisticated field [of class action litigation]…This is not a game for those who are not experienced in the field.”

Plaintiff bar litigator Won J. Kim, the managing partner at Roy Elliott Kim O’Connor LLP, can attest to that. Kim, a co-speaker with Campion at the NICC panel discussion on class action litigation, was counsel for the plaintiffs in McNaughton.

LAUNCHING 1,000 SHIPS

Kim freely and frankly admitted that he had underestimated in Pauli the never-say-die approach of the insurance industry. As part of a national strategy, Campion had used the Alberta court’s ruling in Pauli as a means to undermine the Ontario Court of Appeal’s case in McNaughton.

Kim said he had taken for granted a Supreme Court of Canada decision not to allow an appeal of McNaughton. His tactical mistake in not challenging the Pauli case in Alberta had ended up costing him the Ontario Court of Appeal’s subsequent decision in Polowin, he noted. Polowin essentially erased the McNaughton-based class action lawsuit against 34 large insurance companies and a total of 141 insurance companies across the country.

Campion and Kim offered an interesting blow-by-blow account of the salvage case, which represented a rare end-run around a Supreme Court decision. The litigation over insurance policy deductibles started in 1974, when an Alberta District Court judge issued a decision against insurers in Mueller v. Western Union Insurance Co. That decision, centred around a $100 deductible, laid the basis for the Ontario Court of Appeal’s decision in McNaughton.

“This decision launched 1,000 ships,” Campion said of the Supreme Court of Canada’s decision not to hear an appeal of McNaughton. “In Ontario and Alberta, 141 [insurance] companies were sued.”

Won Kim’s firm participated in the “national strategy” to launch class action litigation. “At this point, we decide, ‘We’re going to mortgage the bank,'” Kim said of his reaction to the Supreme Court’s decision. “By the end of it, we had put in more than Cdn$2 million in cash from capital. We sued 34 of the largest insurers.” Also named in the class action litigation were 117 smaller insurance companies.

“My life was looking sunny,” said Kim. “But then the insurance industry gets into a full frontal offensive.”

At that point, George Cooke, now the president of Dominion of Canada General Insurance Company, got involved on the basis of Dominion’s role as defendant in Polowin. Kim jokingly described Cooke as “evil” for challenging the appellate court’s decision in McNaughton. Basically, Cooke argued the Ontario Court of Appeal had wrongly decided McNaughton. Cooke got together with Campion and they decided to chip away at the Supreme Court decision through a national strategy.

Campion first went to Alberta and successfully obtained a judgment in favour of insurers in Pauli. “We tried to get [the Alberta court] to actually declare that the Ontario decision was wrong,” Campion said. “They wouldn’t.”

Kim said he scoffed at the insurers’ litigation strategy at the time. “I thought, ‘This is ridiculous. This is abuse of process.’ I expected [future salvage litigation] decisions to be about how we were going to roll out the complex [McNaughton] decision, because we had merits from the Supreme Court of Canada.”

But Campion took the Pauli ruling back to Ontario and applied it to Polowin, a case the Ontario Court of Appeal case decided in 2005. In an extremely rare move, the Ontario Court of Appeal heard Polowin with a five-member judicial panel, which only happens when the court’s chief justice requests it. Then the Ontario Court of Appeal did what no one expected it would do: it reversed itself on the McNaughton ruling.

“Our Waterloo was in Alberta,” Kim said. “The error we made was in not flying out to Alberta…We let this gnat in Alberta [hijack] this case…”

LESSONS LEARNED

In discussing lessons learned from the salvage class action litigation, Campion and Kim both noted the personal injury bar has become increasingly sophisticated. Kim noted class action litigation, while relatively young in Ontario’s legal history, produces some very hefty awards. In June 2007, for example, the courts revealed details of a settlement that provided approximately Cdn$1 billion to victims of a blood supply infected with Hepatitis C. And since lawyers take many of these high-cost, high-risk class action cases on a “contingency fee” basis, Kim noted — that is, if they don’t win, they don’t get paid — they aren’t likely to take a case unless they have a good chance of winning it.

“The game has changed,” Kim noted of class action litigation. He noted a “different caliber” of lawyer is getting involved in class actions, which have evolved based on a history spanning two decades. “You’re going to see much more sophisticated players. The last few years, we’ve had the cream of the crop from within law schools [and elsewhere in the legal industry] apply. They see this is where the action is. You’re seeing a different animal enter [the plaintiffs’ bar].”

That breed is increasingly aggressive, Campion noted. To which Kim just laughed: “We don’t apologize for being aggressive,” he said during a question-and-answer session. “We expect an aggressive defence bar. That’s the game.”

Kim noted that a host of top-notch lawyers in the class action game — including himself, past treasurer of the Law Society of Upper Canada, Harvey Strosberg, and former health minister Allan Rock — have all worked at Fasken Martineau at some point during their careers. “We all come from Mother Ship,” quipped Kim. “So whatever ethics that we [plaintiff lawyers] may be tarred with…”

Campion observed “there are very creative counsel” in Canada’s class action game, and so defence counsel must respond with a similar “high level of creativity.” It is very important for insurance defence lawyers to “strategize their cases,” Campion said.

Campion said the normal response for insurers is to settle. Although this may be sensible in many cases, he added, too often the settlement becomes the default option in cases that should in fact be argued in court. “My experience is that plaintiff lawyers don’t like to fight merits,” Campion observed. “Many of these cases can and should be won [by insurers]…

“Every small decision, no matter how small, is highly significant for you [in the insurance industry],” said Campion. “Look a
t how this [Cdn]$100 [deductible in the Mueller] court case turned into this kind of class action.”