Canadian Underwriter

Good Faith

March 1, 2002   by Sean van Zyl, Editor

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Insurance contracts are sold by insurers to provide peace of mind to the buying public, the summary decision court papers applying to the Whiten v. Pilot final appeal case indicate. Specifically, the Supreme Court of Canada, which recently upheld $1 million in punitive damages that had previously been made against Pilot Insurance Co. in a jury trial that was later appealed by the insurer before the Ontario Court of Appeal, observes that, “Pilot holds itself out to the public as a sure guide to a ‘safe harbor’. In its advertising material it refers to itself as ‘Your Pilot’ and makes such statements as: ‘At Pilot Insurance Co., guiding people like you into safe harbors has been our mission for nearly 75 years’.”

The court papers go further to suggest that, “The obligation of good faith dealing means that the appellant’s [Whiten] peace of mind should have been Pilot’s objective, and her vulnerability ought not to have been aggravated as a negotiating tactic. It is this relationship of reliance and vulnerability that was outrageously exploited by Pilot in this case.” The Supreme Court of Canada, in reaching its decision, has opened what many in the insurance industry regard as a “Pandora’s box” to how future legal disputes over claim settlements are likely to be handled by the courts, as well as the financial implications of significantly higher punitive awards. Notably, the court drew specific attention to the “good faith” responsibility of financial institutions engaged in contractual agreements with the public, which for the first time in a Canadian court decision of this kind, specific reference was made to the advertising/promotional material “promise” that had been put out by the company.

In summary, the Whiten family lost their home to fire in early 1994. Having submitted their claim for the losses incurred, Pilot agreed to pay for substitute housing costs for several months, then stopped payments on grounds that the couple in question had allegedly torched their own home with the intent of insurance fraud. A jury court case concluded that there were no grounds to suggest arson, and in addition to compensation for loss costs, a punitive award of $1 million was made against Pilot for not fulfilling its contractual agreement and presumably using “hard ball” tactics to reduce its financial obligation. Pilot appealed this decision before the Ontario Court of Appeal, which by 1999 had reached its own decision and thereby reduced the punitive award to $100,000. The Whitens cross-appealed this outcome, resulting in the latest decision made by the Supreme Court of Canada. In this regard, the court’s conclusion notes, “I would not have awarded $1 million in punitive damages in this case but in my judgement the award is within the rational limits within which a jury must be allowed to operate.”

While the outcome of the Whiten v. Pilot appeal was not surprising to most in the industry, the future consequences for all in terms of volatile tort costs has left many insurer CEOs just a little rattled. As one legal representative for the insurance industry points out, the Whiten v. Pilot case clearly suggests that an “American” approach of jury-based justice of financially “stinging” companies perceived to having committed an injustice appears to have crept into the Canadian court system. The outcome is likely to lead to a greater number of jury cases motivated by “opportunistic” plaintiff lawyers.

Responding to the Supreme Court of Canada decision, Pilot’s president Stuart Kistruck says the company will recognize the court’s decision. However, in a statement released after the decision, he clearly expresses his disappointment with the fact that the original sum of the punitive damage had been restored. He also expresses concern over the broader impact the case may have for the insurance industry as a whole in the manner in which it conducts claims investigations and policyholder legal resolutions.

In this sense, it is probably fair to say that the Whiten case has indeed provided future opportunity for legal exploitation against insurance companies, however, the net impact may prove to be more dramatic than actual. Notably, the court papers observe that a trial judge’s charge to a jury with respect to punitive damages should be (first three points): “Punitive charges are very much the exception rather than the rule; imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behavior; where they are awarded, punitive damages should be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.”

In this respect, the court emphasized the need to apply temperance in jury decisions, and felt specifically that Pilot had violated the code of “good faith”. As such, legal commentators concur that the Whiten case has indeed shifted the attention of the courts toward determining whether a company has fulfilled its “duty of good faith”. However, those companies maintaining professional standards of claims investigation procedure should have no reason to fear the Whiten v. Pilot decision, they conclude.

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