The recent decision Branco v American Home Assurance Company received a lot of attention for the high damages awarded against an insurer for acting in bad faith. Branco was just one of a series of cases dealing with bad faith damages in Canada over the last year. In this article, Siskinds looks at those cases and considers instances when courts may or may not award additional damages when an insurer acts inappropriately. Several recent cases have refined our understanding of insurers’ duty of good faith, but some confusion lingers. Much of the confusion centres on the use of punitive damages. In March 2013, a Saskatchewan court reiterated that insurers must deal with their clients in good faith1. The court chastised the insurer for malicious behaviour and awarded a hefty sum in punitive damages, “hop[ing] that this award will gain the attention of the insurance industry.” While Branco v American Home Assurance Company has received a lot of attention, it is actually just one of several recent cases in which courts have clarified an insurer’s duty to act in good faith. This article will present the basics of good faith and the award of punitive damages. It will then examine two other decisions on the issue and examine their implications in the light of Branco.
Basics of the Duty of Good Faith:
The principles of bad faith are summarized in Wilson v Saskatchewan Government Insurance,2 the details of which are set out below. In Wilson (SKQB), the court held, “[i]t is well established that insurance contracts are characterized by the common law as being contracts of uberrimae fidei or utmost good faith.”3 It also highlighted the dual nature of the principle, in that both parties are required to deal with one another in good faith and with honesty. The court reiterated that the principle of good faith applies to all types of insurance contracts, regardless of whether the parties expressly stated as such in the contract.4
Fidler v Sun Life Assurance Co. of Canada stated that an incorrect decision by an insurer to deny a claim does not necessarily amount to a breach of the duty of good faith.5 Even if the court subsequently deems the claim to be legitimate, the insurer may have acted reasonably and in good faith.
In particular, Wilson (SKQB) explained that the duty of good faith “means an insurer must investigate and assess the claim objectively and on proper grounds, act with reasonable diligence during each step of the claims process to see the claim resolved in a timely way and, if no reasonable grounds for denying coverage or payment exists, pay the claim on a timely basis.”6
These cases explored what the duty of good faith entails, and concluded that insurers’ dealings should be characterized by fairness and reasonableness.
Basics of Punitive Damages:
Punitive damages are not lightly or regularly awarded, as their purpose is punishment of the defendant and not compensation of the plaintiff. In Whiten v Pilot Insurance, Justice Binnie set out guidelines for deciding whether and how much to award punitive damages.7 His eleven considerations are as follows:
- Punitive damages 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 behaviour.
- 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,
- having regard to any other fines or penalties suffered by the defendant for the misconduct in question.
- Punitive damages are generally given only where the misconduct would otherwise be unpunished or where other penalties are or are likely to be inadequate to achieve the objectives of retribution, deterrence and denunciation.
- Their purpose is not to compensate the plaintiff, but
- To give a defendant his or her just desert (retribution), to deter the defendant and others from similar misconduct in the future (deterrence), and to mark the community’s collective condemnation (denunciation) of what has happened.
- Punitive damages are awarded only where compensatory damages, which to some extent are punitive, are insufficient to accomplish these objectives, and
- They are given in an amount that is no greater than necessary to rationally accomplish their purpose.
- While normally the state would be the recipient of any fine or penalty for misconduct, the plaintiff will keep punitive damages as a “windfall” in addition to compensatory damages.
- Judges and juries in our system have usually found that moderate awards of punitive damages, which inevitably carry a stigma in the broader community, are generally sufficient.
As seen in these eleven points, punitive damages are a rare event. In order to warrant a finding of bad faith, an insurer must act unreasonably or unfairly towards a claimant. In order to warrant an award of punitive damages, however, an insurer must act in a “high-handed, malicious, arbitrary or highly reprehensible” manner. The threshold for punitive damages is much higher than the threshold for bad faith.
The insurer must:
- assess the merits of the claim in a balanced and reasonable manner;
- respond to the claim promptly;
- not take advantage of the claimant’s economic vulnerability to gain leverage in negotiating a settlement;
Upon judicial review, the courts will determine:
- whether the insurer’s conclusion was reasonable or “fairly debatable”, in order to determine the existence of bad faith;
- whether the insurer’s conduct was “high-handed, malicious, arbitrary or highly reprehensible” and warrants the award of punitive damages.
Two recent cases on the topic explore the qualities of bad faith and when it is appropriate to award punitive damages. While both courts held that the insurers’ conduct constituted bad faith, only one court award punitive damages.
Saskatchewan Government Insurance v Wilson:8
The unusual fact scenario in Wilson (SKCA) provides an opportunity for examining the limits of punitive damages. The insurer had been paying benefits to Ms. Wilson after two motor vehicle accidents. In 2006, a new claims adjuster took over the file and asked a new physiotherapist, who was operating as a consultant for the insurer, for a review. After reviewing the documentation on file, but without seeing Ms. Wilson in person, the consultant concluded that ongoing treatment would not be beneficial. Her opinion was contrary to the opinions of every other medical and rehabilitation authority who examined Ms. Wilson in person.9 Nonetheless, on the basis of the consultation, the insurer notified Ms. Wilson that they would terminate her benefits in six months.10
Ms. Wilson’s counsel sent a number of letters, asking the insured to withdraw the termination. The insurer did not respond.11 Ms. Wilson commenced the action before the actual termination of her benefits, so she did not actually suffer any economic damages.
The trial court found that the insurer had breached its duty of good faith and awarded punitive damages. Upon appeal, the appellate court agreed that the insurer had breached its duty of good faith, as the consultant was “looking for a putative basis to deny the claim”.12 The insurer relied on a single opinion by someone who had not even examined Ms. Wilson in person, despite the other contrary opinions on file. Furthermore, it failed to respond promptly (or at all) to the letters asking for her benefits to be reinstated.
However, the appellate court held that punitive damages were not appropriate in the circumstances. The court based its decision on two reasons: first, the plaintiff had failed to request punitive damages in pleadings,13 and second, the insurer’s conduct did not meet the higher threshold of “high-handed, malicious, arbitrary or highly reprehensible” behaviour.14 The court emphasized the fact that punitive damages are only awarded in exceptional circumstances. Although Ms. Wilson was successful in establishing that the insurer had wrongfully dismissed her claim, she had sued before termination and therefore had not actually suffered any economic damages. Without the award of punitive damages, the insurer only had to pay legal costs and continue to pay her benefits.15
Fernandes v Penncorp:16
In this case, the issue of good faith revolved around the insurer’s use of surveillance and review. Mr. Avelino Fernandes was a bricklayer who fell, injured his back, and was unable to work as a result of the injury. After two years, his insurance policy entitled him to benefits only if he sustained a “total disability”. The insurer retained investigators who collected 140.5 hours of surveillance. The surveillance showed Mr. Fernandes performing activities such as: lifting a wheelbarrow and a skid in and out of a truck; shoveling earth in and out of a wheelbarrow; carrying boxes, panes of glass, bed frames and boxes out of a house; shoveling cement mix out of a wheelbarrow; and lifting cement blocks from a van into a wheelbarrow. The insurer also received the medical opinion of a doctor, who concluded that “it is impossible to say whether Mr. Fernandes could return to work on a full time basis as a bricklayer.” Based on this information, the insurer decided that he could return to his work in some capacity or a similar job, and therefore was not totally disabled. The insurer terminated his benefits.17
Total disability was defined in the policy as meaning “that as a result of Injury the Insured … is unable to perform any of the important daily duties pertaining to his occupation or profession”.18 The Supreme Court of Canada in Paul Revere Life Insurance Co. v Sucharov stated that this means: “To put the matter another way, an owner-manager is totally disabled from performing his work as such when he is unable to perform substantially all of the duties of that position. … The test of total disability is satisfied when the circumstances are such that a reasonable man would recognize that he should not engage in certain activity even though he literally is not physically unable to do so.”19 Under this definition and judicial interpretation, the court found that Mr. Fernandes suffered a total disability.
The court also found that the insurer had breached its duty of good faith. Multiple medical reports expressed the opinion that Mr. Fernandes would never be able to work at bricklaying again. The only different opinion was the doctor who found that “it was impossible to say” if he could return to work.20 The insurer had not sufficiently considered the job responsibilities of a bricklayer and its high level of strenuous physical activity. The court held that “Penncorp breached the duty of an insurer in handling a claim under an insurance contract set out by Justice O’Connor in 702535 Ontario adopted by the Supreme Court of Canada in Fidler. What [Penncorp] was doing in trying to settle the claim on the basis that Avelino was partially disabled in December 2005 and then in denying Avelino any benefits for six years, was what Justice O’Connor stated that an insurer ought not to do, namely, ‘deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or to gain bargaining leverage in negotiating a settlement.’”21
However, the court jumped immediately from demonstrating bad faith to awarding punitive damages. It held that the conduct “meets the test for punitive damages as being ‘highhanded, malicious, arbitrary or highly reprehensible misconduct’” without ever explaining why. As stated in Wilson, a breach of the duty of good faith does not automatically amount to the highly reprehensible misconduct required for punitive damages.22 The threshold for punitive damages is higher than the threshold for bad faith. The court in Fernandes never undertook a separate examination of whether the insurer’s conduct met that higher threshold for punitive damages. It is likely that the decision will be appealed.
In the recent cases revolving around the duty of good faith in insurance relationships, the judiciary is evidently becoming frustrated with insurers’ conduct. Courts are more readily awarding punitive damages in an effort to express their disapproval and deter future bad behaviour. Branco, Wilson and Fernandes all involve insurers who did not treat the plaintiffs’ claims fairly and reasonably, and thereby demonstrated bad faith. In order to uphold the reciprocal duty of good faith, courts are using punitive damages as deterrence.
However, punitive damages may not always be appropriate in every situation of bad faith. Both Branco and Wilson note that there is a difference of degree between behaviour that constitutes bad faith and behaviour that deserves punitive action. In Branco, the court held that the insurer’s behaviour constituted bad faith and also met the higher threshold for the award of punitive damages. Wilson held that the insurer’s behaviour was evidence of bad faith, but not “high-handed, malicious, arbitrary or highly reprehensible” enough to deserve the award of punitive damages. However, the court in Fernandes failed to draw a distinction between the two thresholds, awarding punitive damages as an automatic response to bad faith. The differences between the judgments demonstrate that there is not yet a firm consensus on this developing area of law.
1 Branco v American Home Assurance Company et al., 2013 SKQB 98.
2 Wilson v Saskatchewan Government Insurance, 2010 SKQB 211 [Wilson (SKQB)].
3 Ibid at para 107.
4 Ibid at para 108.
5 Fidler v Sun Life Assurance Co of Canada, 2006 SCC 30.
6Wilson (SKQB),supra note 2 at para 112.
7 Whiten v Pilot Insurance, 2002 SCC 18 at para 94.
8 Saskatchewan Government Insurance v Wilson, 2012 SKCA 106 [Wilson (SKCA)].
9 Ibid at para 21.
10 Ibid at para 5.
11 Ibid at para 35.
12 Ibid at para 20.
13 Ibid at para 41.
14 Ibid at para 45.
15 Ibid at paras 65-67.
16 Fernandes v Penncorp, 2013 ONSC 1637.
17 Ibid at paras 2-3.
18 Ibid at para 9.
19 Paul Revere Life Insurance Co v Sucharov  2 S.C.R. 541 cited in Fernandes, supra note 16 at para 48.
20 Fernandes, supra note 16 at para 47.
21 Ibid at para 65.
22 Wilson (SKCA),supra note at 8 para 45.