Publication
TITRE
Supreme Court Restores Record-Setting $1M Punitive Damages Award Against Home Insurer
DATE
1 février 2002
Insurance and Professional Liability Team
The Supreme Court of Canada has ruled that a punitive damages award of $1 million against an insurer, while high, was "within the rational limits" given the reprehensible character of its bad-faith denial of its policyholder's fire insurance claim. The ruling establishes a new high water mark for punitive damages in Canada, and underscores the importance for all insurers to deal with their insureds in good faith.
In a ruling[1] that sends a strong message to the entire Canadian insurance industry, the Supreme Court of Canada has restored the $1 million award for punitive damages assessed by a jury against a home insurer at the trial of a claim arising from a fire loss. The award is larger than any other ever made for punitive damages in Canada.
The case involved a claim by Daphne and Keith Whiten for recovery under their homeowner's insurance policy following the 1994 loss of their home to fire. Their insurer, Pilot Insurance, appointed an independent adjuster but chose to reject his advice to pay the claim. Despite the unanimous conclusion of investigating authorities that there was no evidence of arson, the insurer denied the claim on the basis that the fire had been deliberately set. It then formulated a defence strategy that the Court found was intended to "starve the insureds into submission."
At trial, the jury awarded the Whitens compensatory damages of $320,000 for their proven losses resulting from the fire. The jury also awarded three times that amount - $1 million - in punitive damages for the steadfast refusal of the insurer to abandon its ill-founded defence to the claim. The Whitens' entitlement to punitive damages was upheld by the majority of the Ontario Court of Appeal, but was reduced in amount to $100,000. The dissenting member of the Court of Appeal concluded that the original punitive damages award of $1 million ought to be upheld.
A central issue in the case concerned whether, in what is ultimately a claim based on breach of contract, punitive damages can be awarded at all. The Supreme Court of Canada had itself established[2] that where breach of contract is alleged there must be an "actionable wrong" independent of that breach in order for punitive damages to be recoverable. Writing for the majority, Justice Binnie ruled that a refusal by an insurance company to deal with its insured in good faith constitutes an independent breach that permits punitive damages to be awarded:
However, in my view, a breach of the contractual duty of good faith is independent of and in addition to the breach of contractual duty to pay the loss. It constitutes an "actionable wrong" within the Vorvis rule, which does not require an independent tort.
Of greater concern to the Court was the sheer size of the jury award for punitive damages. It represented not only the largest such award ever recovered in a civil action in Canada, but as well a 20-fold increase of the largest assessment of punitive damages ever imposed against any Canadian insurer. After reviewing the history and purpose of punitive damages as they have been awarded throughout the common-law world, the Court ultimately concluded that on the facts of the case the jury award should be restored:
I would not have awarded $1 million in punitive damages in this case but in my judgment the award is within the rational limits within which a jury must be allowed to operate. The award was not so disproportionate as to exceed the bounds of rationality. It did not overshoot its purpose.
[.]
Insurance contracts, as Pilot's self-description shows, are sold by the insurance industry and purchased by members of the public for peace of mind. The more devastating the loss, the more the insured may be at the financial mercy of the insurer, and the more difficult it may be to challenge a wrongful refusal to pay the claim. Deterrence is required. The obligation of good faith dealing means that the appellant's 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 jury, it appears, decided a powerful message of retribution, deterrence and denunciation had to be sent to the respondent and they sent it.
The ruling of the Court was not unanimous. However, the solitary dissent of Justice LeBel was confined to the issue of quantum of damages. Justice LeBel agreed with his colleagues that the bad faith of the insurer "amply justified" an award of punitive damages. The appropriate size of the award, in his view, was that which had been substituted by the Ontario Court of Appeal.
Insurers have in recent years seen a dramatic increase in claims for punitive damages within actions brought by their insureds. The ruling by the Supreme Court of Canada in Whiten convincingly demonstrates that such claims are ignored by insurers at their peril. The Court has noted that awards of punitive damages are becoming increasingly frequent in Canadian civil litigation, and in the course of its ruling the Court has even detailed an 11-point charge to be given to civil juries in cases where punitive damages are claimed. While punitive damages will continue to be generally difficult to recover in cases of breach of contract per se, the conceptual basis for such awards against insurers has now been authoritatively identified. Insurers in Canada will henceforth be held to account not only for the decision they reach in evaluating an insured's claim but as well for the process by which they reach that decision.
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.
For further information, please contact one of the lawyers of the Insurance and Professional Liability Team mentioned below:
[1]. Whiten v. Pilot Insurance Co., 2002 SCC 18.
[2]. Vorvis v. I.C.B.C., [1989] 1 S.C.R. 1085.
Personnes-ressources
Hélène Lefebvre
Montréal
514.847.4457
hlefebvre@ogilvyrenault.com
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Peter J. Stanford
Ottawa
613.780.8626
pstanford@ogilvyrenault.com
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