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Quantifying & Measuring Damages for Bad Faith
By Brian C. Atherton
Atherton Barristers
Introduction
The unprecedented punitive damage award in Whiten v. Pilot Insurance Company heralds a significant departure from the previous method of quantifying and assessing an Insurer’s exposure for Bad Faith claims. Prior to Whiten,
the Supreme Court of Canada stated that punitive damage awards should be increased on an incremental basis. The rationale behind this policy was to allow for stability in the insurance industry. There was a perception that
significant damage awards for Bad Faith would lead to “U.S. style litigation” and shift the emphasis from the subject matter of the contract to the action of the Insurer. In past cases, this was an important consideration as it
had long been held that damages for Bad Faith actions involving contracts were extremely rare. It was not until the Supreme Court of Canada decision in Vorvis v. Insurance Corporation of British Columbia that such damages were given the blessing of our highest court.
However, the decision in Whiten is a quantum leap forward and in a different direction from previous case law.
Whiten v. Pilot Insurance Company
It is obvious the Court was significantly influenced by the following facts:
- The Insurer’s allegation that the fire was a result of arson was obviously without merit
- The Insurer ignored the evidence of its own experts
- When the claim was denied, no explanation was offered to the Insured
- As a result of the denial, the Insured’s were “forced out into the snow”
- The Court found that the highest level of management was aware of these decisions, but took no steps to correct the deficiencies
- The actions of defence counsel throughout the course of the action was considered outrageous and bordering on misconduct
- The Court found that the Insureds had breached a “Peace of Mind Contract” when they knew it would have a detrimental effect on the Insured.
Analysis of Supreme Court of Canada in Upholding Quantum
“In Hill, supra, Corrie J., while emphasizing the overriding obligation of
rationality, also recognized that the Jury must be given some leeway to do its job. The issue of punitive damages, after all, is a matter that has been confided in the first instance to their discretion. Thus, to be
reversed, the award of punitive damages must be “so inordinately large as obviously to exceed the maximum limit of a reasonable range within which the Jury may be properly instructed."
The Supreme Court’s analysis lead them to conclude that there were two guiding principles in determining when punitive damages should be awarded and in
what amount:
Rationality
“In directing itself to punitive damages, the Court should relate the facts of the particular case to the underlying purposes of
punitive damages and ask itself how, in particular, an award would further one or other of the objectives of the law, and what is the lowest award that would serve the purpose, i.e., because any higher award would be irrational
.... It is rational to use punitive damages to relieve a wrong doer of its profit where compensatory damages would amount to nothing more than a license fee to earn greater profits through outrageous disregard of the legal or
equitable rights of another.”
Somewhat later the Court also noted that the standard of appellant review applicable to punitive damages, is that a reasonable Jury, properly
instructed, could have concluded that an award in that amount and no less, was rationally required to punish the defendants misconduct.
The rationality test applies both to whether an award of punitive damages should be made, as well as the question of its quantum.
It would appear that the Supreme Court of Canada has opened Pandora’s box. Virtually all claims will include an allegation of Bad Faith, and the
Insurer’s entire claims handling practices will be subject to scrutiny. Therefore any fact, which offends the Jury sensibilities will provide them with an opportunity to “punish” the Insurer. The Supreme Court has held that the
Jury award must be “rational” in light of the misconduct, and the imposition of other penalties or damages. However, the Supreme Court has also provided extensive directions to the Trial Judge when charging the Jury. It is
presumed that in many cases both counsel will take the opportunity to present a range of punitive damages. It is submitted that this process will only confuse Jurors, and they will feel compelled to make some award wherever
they are offended by the Insurer’s misconduct. Given that the actions of its employees from the president on down will be subject to scrutiny, there seems to be ample opportunity to find some facet of that conduct which does
not sit well with a Jury. This concern is highlighted by the Court’s attempt to use the concept of “Proportionality” in determining whether punitive damage awards are “rational."
Proportionality
The Supreme Court outlined six criteria, which should be considered by the Jury in determining the quantum of a punitive
damage award:
- It must be proportionate to the blameworthiness of the defendant’s conduct;
- It must be proportionate to the degree of vulnerability of the plaintiff;
- It must be proportionate to the harm or potential harm directed specifically at the plaintiff;
- It must be proportionate to the need for deterrence;
- It must be proportionate, even after taking into account the other penalties, both civil and criminal which have been or are likely to be inflicted
on the defendant for the same misconduct;
- It must proportionate to the advantage wrongfully gained by a defendant from the misconduct.
Blameworthiness
“The more reprehensible the conduct, the higher the rational limits to the potential award. The need for denunciation is
aggravated where, as in this case, the conduct is persisted in over a lengthy period of time (2-years to trial) without any rational justification and despite the defendant’s awareness of the hardship it knew it was inflicting.
Indeed the respondent anticipated that the greater the hardship to the appellant, the lower the settlement she would ultimately be forced to accept.”
Additional factors enunciated by Court with respect to “blameworthiness” include the following:
- Whether the conduct was planned or deliberate;
- What was the intent and motive for the conduct?
- Whether outrageous conduct persisted over a lengthy period of time;
- Whether there were any attempts by the Insurer to cover up the misconduct;
- Was the Insurer aware that its actions could be considered “wrong”?
- Did the defendant profit from his misconduct?
- Was misconduct deeply personal to the plaintiff, i.e., loss of professional reputation, loss or irreplaceable items?
Vulnerability
It seems clear that the Supreme Court was prepared to let the Jury decision stand primarily because of the sympathetic factual
circumstances, coupled with the Court’s finding that the Insurer had offered a “Peace of Mind Contract” and then sought to destroy such peace of mind.
The Court highlighted these criteria when it stated:
“The financial or other vulnerability of the plaintiff and the concept of abuse of power by a defendant is highly relevant where there is a power
imbalance ...A significant award was needed to deter Pilot and other Insurers from exploiting the vulnerability of Insureds, who are entirely dependent upon on their Insurers when disaster strikes. “
The fact that Pilot’s slogan lead Insureds to believe that they would be guided into a “safe harbour” undoubtedly had some impact upon the Court.
However the Court emphasized that an award for punitive damages is not to compensate for “hurt feelings” which are more appropriate in an award of
aggravated damages.
Proportionality to Degree of Harm
The Court made a significant reversal of its prior decisions, and those of other Appellant Courts when it
held that outrageous or reprehensible conduct, which causes little damage, will still attract punitive damages. This is a marked departure from earlier decisions, which held that in order for there to be an award of punitive
damages, there must have been some loss suffered by the plaintiff. This comment is more in keeping with the policy at the Financial Services Commission to “punish” an Insurer with a special award where there is a finding of
misconduct notwithstanding the fact that the Insured may have been “made whole” by payment of the claim, inclusive of interest and costs up to the date of arbitration. This decision opens the door to situations where the
Insurer’s conduct, for some period of time may be considered “reprehensible” but then the Insurer recognizes its wrongdoing and tries to put the Insured back in the same position it would have been prior to the misconduct.
Whiten would suggest those cases will still go forward on the allegations of Bad Faith notwithstanding the fact that the Insured has been paid in full. The focus will then be solely on the Insurer’s conduct, and not on whether
there is liability for the loss. This concept dovetails with the suggestion in Whiten that there should be bifurcated trials, i.e., trials solely on the question of punitive damages.
Deterrence
As a general principle, the Courts have held that deterrence is appropriate where it will send a message to other Insurers not to
engage in similar conduct. This consideration would seem to have more relevance in situations where there was a finding that the insurance company, as an entity, approved of or instructed its adjuster’s to engage in the alleged
misconduct. However, the Court in Whiten found that there was no evidence that the Company engaged in such practice on a regular basis, or that it was Company policy. Notwithstanding this finding, the Court felt that there was
still a need to deter other Insurers from engaging in such conduct; which is unusual, given that the facts of the case are so distinctive that it is difficult to imagine any Insurer engaging in such a practice.
At the heart of their decision, is a suggestion that any outrageous or reprehensible conduct should be deterred. In essence it is a suggestion that
there will be “zero tolerance." It is a message that Insurers will be held to a very strict standard in their conduct and especially when dealing with “Peace of Mind” Contracts.
Proportionality when considered with other sanctions
Fortunately, the decision in Whiten has still left intact the principle that punitive
damages are an award of “last resort." If there are other sanctions or penalties, which have been imposed on the Insurer, which have the effect of significantly deterring others from engaging in similar practice, then the
Court may not feel inclined to award punitive damages. Those sanctions might include the following:
- Criminal sanctions
- Regulatory sanctions
- Awards of aggravated damages
- Other awards of a “punitive” nature, i.e., interest at two percent compounded monthly for several years.
- Award of substantial indemnity costs
The last two points are novel. Thus far no case involving a claim for Statutory Accident Benefits with arrears of interest at two percent per month
compounded monthly has been brought forward to the Court for consideration as to whether damages for bad faith are appropriate. There are obiter comments in many decisions at the Financial Services Commission and
elsewhere to the effect that the interest provisions found in the SABS are “punitive." A strong argument can be made that an award of the arrears, which contains an interest provision, which is equal to or perhaps in some
cases double that of the original loss is itself a “punitive damages award."
The new substantial indemnity scale of costs is also somewhat punitive in the sense that the successful litigant will be almost fully compensated by the
unsuccessful party for their own solicitor’s costs. It is submitted that in many cases, the addition of punitive prejudgement interest and substantial indemnity costs will act as significant deterrent.
Proportionate to advantage gained by a defendant
Although this consideration was raised in an action involving a breach of a homeowners
contact, it is probably more appropriate to claims in a commercial setting. For example, in Lubrizol v.
Imperial Oil, the Court found that the defendant deliberately breached an injunction restraining them from selling a product, which was licensed to the plaintiff. Although there was no good evidence as to the amount of profit from the sales, the Court awarded $15,000,000.00 in punitive damages. A similar consideration was noted in the decision of Pro C v. Computer City, where a deliberate breach of the trademark by the defendant, coupled with fraudulently misleading customers that it owned the trademark, and a failure to stop selling when notified of the infringement resulted in a punitive damages of $750,000.00. In that case there were $450,000.00 in actual damages and $750,000.00 was considered to be a “reasonable” amount.
However, the decision in Whiten opens the door to the suggestion that a history of conduct designed solely to force Insureds into an economically
advantageous settlement, as part of a corporate policy, would require deterrence in the form of punitive damages.
This conduct has significant ramifications both for the manner in which Insurers conduct their negotiations, as well as production issues and the costs
of defending such claims. OTLA is probably already in the process of gathering examples of “advantageous economic settlements” from individual Insurers to argue a “course of conduct” which might lead to an award of punitive
damages.
Other Considerations
Some of the other considerations noted by the Supreme Court of Canada are as follows:
- The conduct of the Insurer need not be sufficiently reprehensible to constitute a separate tort
- The focus is on whether the conduct offends the Court’s sense of decency
- While catch phrases of “high-handed”, “oppressive” or “vindictive”, may still be relevant, they are no longer the “gold standard” in determining
when an Insurer’s conduct will merit an award of punitive damages
- The focus is now not on the plaintiffs loss but whether the defendant’s misconduct is such, taking all other factors into consideration, that
punitive damages should be awarded
- An award of punitive damages must be “fair to both parties” (which begs the question as to whether it was “fair” to uphold an award of one million
dollars, which was approximately 20 times greater than any previous award)
- Use of ratios to determine punitive damages is inappropriate
- The guiding factor is now on whether the award is proportionate to the wrong doing of the Insurer and whether the award is a rational response to
such wrongdoing
- One million dollars is not the “cap” on punitive damage awards and awards of greater than one million dollars will probably be upheld if the
conduct was even more reprehensible, or the loss suffered by the Insured was greater than in Whiten
- Peace of Mind Contracts require different considerations
- A failure to pay the claim in a timely fashion, or deny the claim without any evidence or rational basis as a breach of the duty of good faith is
prima facie evidence of bad faith
- A failure to properly investigate a claim is not Bad Faith, but investigations, which discloses no rational basis for the decision not to pay
benefits is a giant leap along the path to an award of punitive damages
Assessing and Quantifying the risks post Whiten
In light of the Whiten Decision and the fact that most punitive damage awards will be decided
by a Jury, it is extremely difficult if not impossible to accurately predict, given any specific fact situation, whether punitive damages will be awarded, or the quantum. However, the following checklist, will serve as a
template for determining the risk in each individual case:
- Is this a “Peace of Mind Contract”
- If so special considerations apply to a decision to deny benefits under the contract
- What is the underlying basis for denial
- Is there a rational basis for denial e.g. a clear breach of the policy provisions; the loss complained of is not part of the subject matter of the
contract; expert evidence in support of a decision to terminate or deny benefits.
- What effects will a denial or termination of benefits have on the Insured’s personal situation; and what actions has the Company taken to carefully
consider the impact of a denial of termination on the Insureds personal circumstances
- How is the claim being defended post denial/termination, i.e., complete obfuscation, inappropriate denials of wrongdoing, overly aggressive tactics
by defence counsel, significant delaying tactics to gain an economic or tactical advantage which has a detrimental affect upon the Insurer’s personal circumstances
- Are there checks and balances in place with the Company to stem “over zealous” conduct by independent adjusters or other agents, or its own
adjusters
- Has the company been subjected to other civil or criminal sanctions
- What other damages are claimed by the Insured, i.e., aggravated damages, “punitive” interest, substantial indemnity costs
- Prior evidence of Bad Faith
- Mood of the public
- Trial by Judge or Jury
The guiding principle to assessing the risk is whether the actions complained of by the Insured warrant deterrence in the form of punitive damages. The
conduct of the insurance company, from its highest officers down to the front line adjusters will be subject to scrutiny. Isolated acts should not result in an award of punitive damages, as that would not be a “rational”
response to the need for deterrence. The more difficult question to answer is how many such acts, constitute a “course of conduct” which rationally requires an award of punitive damages. The more information which demonstrates
a corporate policy, designed to achieve economic advantage, particularly in cases involving Peace of Mind Contracts will move higher up the punitive damage scale.
While the amount of the award in Whiten is certainly alarming, the greater fear is that juries will now feel inclined to make an award of punitive
damages in almost every case where there is any conduct which “offends their sensibilities." Thus the true impact of Whiten may not be in upholding a million dollar award, but rather upholding the “sanctity” of the Jury
System.
Conclusions
Assessing the risk and quantifying a punitive damage award will be extremely difficult in the post Whiten era. Virtually all cases
where there has been a termination of benefits in a Peace of Mind Contract, will be potentially subject to damages for Bad Faith. However, the decision in Whiten has provided the framework within which the Insurers can assess
their risks. It is anticipated that virtually all Insurers will modify their practice to ensure that the conduct demonstrated in Whiten is not repeated. Unfortunately, adjusting remains within the province of individuals who
are not perfect. Mistakes will happen, which will have unforeseen consequences. The most the Insurer can do is be aware of the prevailing mood of the public, and the judiciary, and concede that improper conduct, once
identified, cannot be justified, and take whatever remedial steps are available to placate the Insured. Some cases will have to go through the system to set the further parameters for such awards. Insurers should not be
intimidated by Whiten, but rather continue to adjust claims in light of its principles.
APPENDIX
Additional case law illustrating Whiten principles:
Clarfield v. Crown Life Insurance Company
- Claim for aggravated, exemplary and punitive damages for breach of disability policy Failure by adjusters and supervisors to properly interpret
terms of their policy.
- Evidence from those employees company not to pay in accordance with language of policy
- Medical evidence used by Insurer did not properly address question of disability
- Insurer’s staff attempting to resist claim on own interpretation of medical evidence
- “Peace of Mind” contract
- Economic advantage in delaying and denying claim in favour of Insurer
- Finding that Insurer’s employees were acting in accordance with the company’s approach
- Finding that employer is responsible for actions of employees
- “Crown Life totally failed to assess Mr. Clarfield’s claim in a balanced and reasonable manner and failed to act freely in dealing with it”
- Aggravated Damages awarded in the amount of $75,000.00 Punitive Damages awarded in the amount $200,000.00
Cross v. Canada Life Assurance Company
- Insurer delayed payment of disability benefits for almost one year
- Insurer claimed anxiety and depression as a result of not having any income
- Insurer collapsed R.S.P. account to obtain money for living expenses
- Court found Insured entitled to aggravated damages for mental distress in the amount of $29,000.00
- Punitive damages not awarded
EXAMPLES of “MISCONDUCT” BUT NO DAMAGES FOR BAD FAITH
Bullock v. Trafalgar Insurance Company of Canada
- An Insured claimed damages for loss of automobile destroyed by fire
- Insurer investigated claim and denied
- Plaintiff provided expert evidence in support of its claim
- Insurer failed to obtain any or adequate expert evidence to refute plaintiffs position
- Court found overwhelming evidence that Insured did not start fire
- No original basis for denial
- Failure to withdraw allegation in face of overwhelming evidence is breach of duty to act in good faith. While Insurer unreasonable in refusing to
withdraw denial, conduct did not constitute malicious or callus action (now less relevant considerations)
- Compensatory damages substantial
- No evidence Insurer profited from wrongdoing
- No punitive damages awarded
Pisciotto v. CAA Insurance Company (Ontario)
- Insurer found to have improperly calculated benefits, did not conduct F.A.E. despite recommendation to do so, used doctor recommended by an
adjuster in a companion action, shared surveillance with tort feasor, turn downed benefits on more than one occasion, all showing poor judgment but not conduct warranting Bad Faith or an award of punitive damages
702535 Ontario Limited v. Lloyds of London Non Marine Underwriters
- Claim for consequential and punitive damages for failing to pay fire loss claim in a timely fashion
- Policy required payment within 60-days of Proof of Loss
- Court found that plaintiff did not suffer any damages and part of denial of claim upheld at trial
- Breach of duty to pay claim promptly, is breach of good faith and potentially actionable wrong
- However breach complained of did not cause damage
- As no damage, no reason to “punish” defendant
- Court further noted that Lloyds conduct did not appear motivated by malice or ill will directed towards Insured.
Migos v. Zurich Indemnity Company of Canada
- Claim for Accident Benefits as result of car accident
- Plaintiff developed fibromaylagia
- Insurer suspended Weekly Income Payments on grounds Insured did not attend neuropsychological assessment
- Insured did not attend as she was afraid to re-experience accident
- Insured went on to develop mental distress
- No punitive or exemplary damages awarded as mental distress not caused by reckless or malicious acts of Insurer
- Request by Insurer to attend assessment reasonable under circumstances in light of need to obtain medical information
Barker v. Zurich Insurance Company
- Insured claimed damages for theft of vehicle
- Investigation determined vehicle submerged in water and claim denied
- Zurich contacted ICPB to investigate claim
- Police conducted a separate investigation without Zurich’s involvement
- Insured refused opportunity to let Zurich review vehicle prior to repairs
- Court found absolutely no evidence on which a Jury could award punitive damages
- Court also noted there was no proof of any actual losses sustained by Insured over and above subject matter of contact.
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