Bad faith damages continue to struggle to gain a foothold in Canadian courtrooms. Due largely to the groundbreaking decision of Whiten v. Pilot, victims of insurance companies that unreasonably withhold benefits have an avenue for seeking justice. Whiten and the cases that have followed from it have exploded onto the Canadian insurance scene. The spectacular results of Whiten, and more recently, cases like Plester and Mazza2 have seen massive media coverage, prompted the entire Canadian insurance industry to rethink how it does business, and forever changed the landscape of insurance/personal injury litigation in Canada.
We must, however, keep these groundbreaking decisions in perspective. Almost a decade after the jury awarded $1 million dollars in punitive damages in Whiten, you can still count the number of significant Canadian bad faith award cases on your fingers. In the majority of those cases, the trial only took place because the insurance companies refused to make any real attempt to settle the lawsuits. Plaintiff’s counsel in Whiten, Mazza and Plester have gone on record as saying they would likely have settled these cases long before trial if their clients had received reasonable offers. We owe these decisions to a unique combination of dedicated counsel, willing plaintiffs and unreasonable insurance defendants who actually believed that their unreasonable and callous denial of legitimate claims was justified.
The future direction of bad faith litigation in Canada remains an open question. The very insurance companies that have engaged in improper behaviour are using these awards to lobby governments to limit the claims of victims in the Province of Ontario. The judiciary continues to how a marked reluctance to import “American style” punitive damage awards. Consider, for example, Beaird v. Westinghouse Canada Inc,3 where a trial judge awarded punitive and aggravated damages for bad faith wrongful dismissal, but the Court of Appeal overturned these awards on the basis that no independent actionable wrong existed since the notice period damages issue had settled prior to trial.
Another example of judicial restraint in bad faith litigation is Anderson v. Zurich Insurance Co.4 Anderson’s son came across a car stalled on railway tracks while a train was quickly approaching. Anderson used his own vehicle to force the other vehicle off the tracks saving the life of the occupant of the other car. His own car was destroyed. He was widely praised for bravery, but ended up being sued by Via rail and having his insurance terminated. Anderson’s mother (the owner) sued her own insurance company, Zurich, for a declaration that her son was not responsible for any damage. Justice Zalev granted this declaration and held that the other driver was responsible. However, since the other driver was not sued, he could not be held liable. With respect to the claim against Zurich, the trial judge found that the defendant’s conduct in dealing with the claim was “unreasonable and wrong-headed.” The evidence showed that Zurich had hired an investigator to attempt to find out damaging information about the son, and this conduct was found to be “reprehensible,” but the judge concluded Zurich had not breached its duty of good faith dealing with the Plaintiff’s claim.
Judicial restraint regarding bad faith awards is also found in the Court of Appeal decision of Ferme Gerald Laplante & Fils Ltee. v. Grenville Patron Mutual Fire Insurance Company,5 where the Court overturned a substantial bad faith award. The Plaintiff operated a family dairy farm which was badly damaged by fire. Negotiations began immediately after the fire, but the parties were unable to agree on the value of the claim. Grenville paid over $1 million dollars for non-contentious claims, but Laplante sued for an additional $700,000. The jury allowed almost $500,000 for compensatory damages and an additional $750,000 for punitive damages for bad faith. Madam Justice Charron, for the majority, however, overturned the punitive award on the basis that the bad faith conduct in this case was not sufficiently egregious to attract consequences. She notes that,
Having considered the evidence as a whole and the respective positions of the parties, it is my view that a reasonable jury, properly instructed, could have concluded, in its assessment of the conduct of the insurer throughout the claims process, that Grenville had breached its duty to act fairly and in good faith in failing to pay promptly those amounts it reasonably believed were owing under the policy. As such, Grenville could be made liable to pay any consequential damage resulting from such breach. No such damage is in question in this appeal. However, it is my view that no reasonable jury, properly instructed, could conclude that the conduct in question was so outrageous or extreme as to warrant punishment.6
Charron, J.A., viewed the trial judge’s charge as inadequate because it failed to provide adequate instruction as to the nature and extent of the insurer’s obligation to act fairly and in good faith as distinct from its primary obligation to pay what was owed under the policy.7 She rejected the argument that attempting to force the plaintiff to accept a lesser settlement was bad faith conduct since the Plaintiffs were represented by counsel. In a spirited dissent, Madam Justice Weiler argued that it was rational for the jury to have made the award for punitive damages, but even she was not prepared to allow the $750,000 award to stand, and indicated that she would have reduced the bad faith award to $200,000.8
Overall, Charron, J.A. concludes that, although it was open to the jury to find Grenville had breached its duty of good faith no jury properly instructed could conclude that this breach was so outrageous or extreme as to warrant punishment. Thus, while rejecting the appellant’s position that it did not breach its duty of good faith, she has accepted the appellant’s subsidiary position that its breaches of good faith are not sufficient to warrant punishment. . . .
In my opinion, the award of punitive damages … although not inevitable or unavoidable, was rational. The jury was obviously incensed at Grenville’s handling of Laplante’s loss of income claim and in the other subsidiary areas I have discussed. The jury was in a much better position than we are to assess the nuances of the evidence and the inferences that might reasonably be drawn form the cumulative effect of Grenville’s conduct and to conclude, as it must have, given the trial judge’s charge, that Grenville acted with malice
Traynor v. Unum9 is a recent example of judicial reluctance to provide a remedy for bad faith conduct even in the face of extreme hardship. In Traynor, the Plaintiff successfully brought a motion for an interlocutory injunction requiring Unum to pay benefits prior to the determination of his entitlement to benefits at trial on the basis that he was in dire financial circumstances and would therefore suffer irreparable harm without the Order. However, the Divisional Court overturned the initial ruling holding that living in poverty does not amount to irreparable harm.10
In the face of what appears to be judicial reluctance at the Appellate level to allow for the expansion of bad faith damages in Ontario, it is critically important that Plaintiffs’ counsel develop effective strategies to build bad faith claims and make them stick.
When building a bad faith claim, it is crucial to have a clear idea of the difference between bad faith damages and punitive damages. Punitive damages are an important aspect of bad faith damages, but they are only a part of the larger concept. Simply put, all punitive conduct is bad faith, but not all bad faith conduct is punitive. Bad faith is difficult to define. It is most often defined by example. The problem with that approach is that is does not provide a conceptual basis for understanding the principle. In my view, bad faith is best defined as the unreasonable withholding of benefits by an insurance company. This is consistent with the leading American case which defines bad faith as nothing more than “a duty not to withhold unreasonably payments due under a policy.”11 The bad faith standard does not require an insurer to be correct, but only to be reasonable. This is affirmed by the Ontario Court of Appeal in 702535 Ontario Inc. v. Non-Marine Underwriters, Lloyds of London:
This duty of fairness [good faith and fair dealing], however, does not require that an insurer necessarily be correct in making a decision to dispute its obligation to pay a claim. Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith…. What constitutes bad faith will depend on the circumstances in each case. A court considering whether the duty has been breached will look at the conduct of the insurer throughout the claims process to determine whether in light of the circumstances, as they then existed, the insurer acted fairly and promptly in responding to the claim.12
Any bad faith analysis, by definition, will turn on an examination of whether the insurer was fair and reasonable with respect to its decision to delay or withhold benefits.
In some rare cases, unfair and unreasonable refusal to pay benefits will be found to vindictive, spiteful, wanton, high-handed and malicious. These are the worst sorts of bad faith cases, and will generally warrant significant punitive damages awards.
What about the cases, however, where the insurer has been unreasonable, but not in the opinion of the judge, malicious or vindictive? In too many cases, analysis for bad faith damages has terminated with the determination that punitive damages were not warranted.13 A close reading of the jurisprudence makes it clear that damages can flow from bad faith conduct even when punitive damages are rejected. The Court of Appeal set out the distinction clearly in LaPlante v. Grenville14 when it held that,
A breach of the duty to act fairly and in good faith gives rise to a separate cause of action [and] may result in an award of consequential damages…. In addition, in an exceptional case where the insurer’s misconduct is sufficiently malicious, vindictive or reprehensible … a breach of the duty to act fairly and in good faith can also found a claim for punitive damages.15
A case where the Court of Appeal made this distinction to the detriment of the Plaintiff was 702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd’s of London.16 The central issue in this litigation was whether consequential and punitive damages should be awarded against Lloyd’s for delaying payment under a fire loss policy for over 18 months. The trial judge held that Lloyd’s had not breached its duty of good faith and fair dealing and dismissed that portion of the claim. The Ontario Court of Appeal overturned the judge based on the finding that Lloyd’s had no valid reason for not paying at least half of the claim, and its failure to do so within a reasonable period of time constituted a breach of the duty of good faith. The Court specially found that Lloyd’s conduct was not motivated by malice or vindictiveness. The bad faith conduct was not sufficiently reprehensible, therefore, to warrant an award of punitive damages. Consequential damages flowed from the finding of bad faith, but the Court found, on the facts, that the consequential claim was not meritorious. A valid bad faith claim, affirmed by the Court of Appeal, was therefore found to be worth nothing.
This case underscores the need to lay the proper foundation for all aspects of a bad faith case. The large punitive bad faith cases have captured our imagination, but the fact is that such cases are very rare. The Canadian experience, moreover, has been the evidence of punitive bad faith conduct may not appear until well into the trial itself.17 Many of the other papers at this conference focus on building the punitive damages case and I defer to them.
It would be a mistake, however, to focus solely on punitive bad faith damages. Insurers may be vulnerable to attacks for consequential and aggravated damages due to bad faith conduct. Two cases highlight the point.
The first is Clarfield v. Crown Life Insurance Co.18 Clarfield purchased an Income Replacement Plus disability policy in 1992 when he was earning over $200,000 per year. In 1996, he started his own company which was not profitable for some time. In September 1997, he applied for disability benefits due to a major affective disorder. Pursuant to his policy, Mr. Clarfield was entitled to pick his best two consecutive years in the previous five for the purpose of calculating his benefit entitlement. Despite clear medical evidence proving his disability, the claims adjusters wrote him saying that there was no evidence of total disability. They offered him “extra-contractual” payments of $4,800 but asked him to sign a letter indicated that he agreed with their position (i.e., that he did not meet the test for disability). Mr. Clarfield was confused and upset. He was attempting to retrain for a less stressful occupation, but Crown Life did little to assist him with his retraining. When he did return to a training program at Nesbitt Burns, the insurer took the position that he had recovered and was not entitled to further benefits. Notwithstanding that the policy had provisions allowing for residual benefits, no one from Crown Life ever discussed this matter with Mr. Clarfield. Crown Life seemed to assume that this benefit would not be payable to someone who had not been earning money at the time he became disabled. The trial judge found that Crown Life selectively interpreted the medical reports, and the conclusion that they indicated Mr. Clarfield was not disabled was totally unreasonable in the circumstances. He was highly critical of the way that Mr. Clarfield was treated, and agreed with the submissions of counsel that disability insurance is for “peace of mind,” and Mr. Clarfield was financially and emotionally vulnerable after he applied for benefits. Further, his particular illness affected his judgment and mental and emotional well-being and left him “defenceless to advocate for himself.”19 It is this vulnerable individual that Crown Life attempted to pressure into compromising his claim.
The trial judge awarded punitive damages of $200,000, but also aggravated damages of $75,000 to compensate Clarfield for the public humiliation of having to sell his house.20
An even better distinction between punitive and aggravated bad faith damages is made in the Newfoundland long-term disability action of Fowler v. Maritime Life Assurance Co.21 Fowler purchased insurance in 1976, and made a claim in 1990 upon becoming disabled due to hypertension, anxiety attacks, stress, and heart palpitations. Fowler was treated terribly by Maritime Life and penalized for the fact that his doctor took a long time to send in medical reports. Benefits were wrongly withheld and Fowler was forced to sell his home, eat into his savings, and reduce his living expenses.
After hearing all the evidence, the trial judge found that Maritime Life had breached its duty of good faith towards Mr. Fowler, and that Maritime’s attitude was “adversarial from the outset.” Maritime used flimsy excuses and questionable policy interpretations to wrongly refuse to pay benefits.
The Judge also found that Maritime’s eleventh-hour offer to reinstate benefits, with interest, if Fowler abandoned his bad faith claim was, in itself, a bad faith gesture noting,
The defendant simply offered to pay the arrears and re-instate Mr. Fowler. It had not actually been done up to the date of trial. I can only conclude that the defendant wished to apply further financial pressure to the plaintiff to encourage him to drop the remaining parts of this claim for aggravated damages, punitive damages and solicitor/client costs. 22
Maritime’s approach was found to be misguided, unnecessary, harsh and arbitrary causing emotional and financial stress at a time when Mr. Fowler was particularly vulnerable justifying an award of aggravated damages of $75,000 plus solicitor and client costs.23
How do you go about building the consequential and/or aggravated bad faith case? In my view, unlike the punitive bad faith case which is largely based on what is in your opponent’s file, consequential and aggravated damages can be developed by carrying out a careful analysis of how the insurer’s conduct has impacted your client. There are some important points to focus on when building a bad faith case.
I. Make sure your pleadings provide a sufficient base for building the bad faith case.
Bad faith pleadings need to be both specific and broad at the same time. They must set out specific examples of bad faith conduct to allow the insurer to know the case it has to meet. Failure to provide support for bald allegations of bad faith may result in your claim being struck.24 Further, if you decide you want to sue individual insurance adjusters and claims examiners, it will likely be necessary to lead specific evidence of why the Plaintiff would have an independent cause of action against those people.25
Be aware of the fact that punitive, aggravated and consequential are all different heads of damages and make sure you plead it that way. Bad faith conduct can give rise to all of the above, but the test for each is different and it is a mistake to lump them together.26
While it is crucial to plead more than mere boiler plate allegations, you must also draft your claim generally enough to be able to go looking for evidence of bad faith. Remember that in Whiten, Plester, and Mazza much of the bad faith evidence did not fall out until trial. Remember the general rule: if you don’t plead it, you can’t ask about it. You can always abandon a bad faith claim if defence counsel proves his client has not acted improperly; however, if you don’t plead broadly enough, you won’t be allowed to get the evidence to make your own determination. A good example of pleadings limiting the scope of production is the recent decision of Sathiyapalan v. Citadel General Assurance Co.27 The plaintiff made “bald allegations” of bad faith and moved for production of the defendant’s claims manuals, directives, etc. Master Kelly refused to order production noting,
Nowhere is it pleaded that the Defendant had a policy of denying valid claims and issued directives and guidelines for its adjusters to implement such policy. Nor does the Statement of Claim allege that the adjuster(s) failed to follow guidelines or directives or manuals provided by the Defendant and failed to follow instructions therein either deliberately or negligently. … In my view, therefore that Defendant’s manuals and directives and procedural memoranda of general application lack semblance of relevance to the issues, as currently pleaded. They need not be produced.28
II. Conduct detailed interviews with your client to build consequential damages case from day 1.
Most clients who have been wrongfully denied LTD payments or accident benefits will be hurt and angry. My experience has been that they tend to focus on what the insurer’s conduct has cost them. Where possible, this energy should be turned towards documenting all economic losses that flow from the insurer’s conduct.
Consider asking your clients to keep a ledger or journal setting out their losses. You should specifically ask your client about lost investments, lost interest on GICs and RSPs that needed to be cashed in, tax penalties, losses incurred from having to sell assets quickly, real estate losses,29 moving expenses, public transit costs, user fees, lost economic opportunities for spouses, etc.
When discussing this issue with your client, it is important to attempt to control expectations. I usually tell clients that it is possible, but not likely that we can seek compensation for these sorts of things, but I cannot evaluate the claim until they provide me with all relevant information. If there are sufficient losses to generate a claim, this information should be sent to a forensic accountant to prepare an economic loss report.
III. Explore “Piece of Mind” and emotional well being issues with the Client.
It is black letter law that a primary reason for entering into insurance contracts is to provide the insured with security and protection in times and disaster and crisis. Insured’s that need assistance are often vulnerable, and the failure of an insurer to quickly and fairly adjudicate a claim can often give rise to aggravated damages.30 Victims who are wrongly denied benefits are often in no condition to assert their rights against an insurance company. They are physically, emotionally, psychologically and financially weakened.
This vulnerability can lead to all sorts of problems in the Plaintiff’s life that may give rise to aggravated damages. It is important to ascertain how the insurance dispute is affecting the clients marriage, sense of self-worth, relationships with friends and family, and general well being.
In some cases, I have found that the best way to deal with these sorts of issue is to refer my client to either a social worker or a psychologist. Social workers are generally better able to prepare reports detailing the negative impact an insurer’s conduct has inflicted upon a family unit. Psychologists have proven particularly helpful in generating reports to help substantiate emotional and psychological damage caused by insurers’ conduct.
Let me give two specific examples of using psychologists to build a bad faith damages claim. John Doe received benefits for some time, but Canada Life terminated his benefits after a short return to work program which quickly failed. We sued Canada Life, who reinstated benefits after their own psychiatrist confirmed disability at a DME. To assist with the ongoing bad faith, I sent John to a psychologist, who writes,
However, it is important to note that the ongoing difficulties with his insurer also contributed significantly to all of his above noted psychological difficulties. More specially, this man was psychologically vulnerable to begin with, and the ongoing conflict with his insurer, as well as the financial stress that it imposed on him, served to perpetuate and increase his symptomatology…. The ongoing conflict with his insurer aggravated his premorbid personality structure, resulting in more paranoid, narcissistic, borderline and avoidant features. At present, even though his long-term disability benefits have been reinstated, [John] continues to be emotionally affected by his insurer’s treatment of him.
In another case, we act for a lady that was severely brain injured in a car accident leaving her with serious problems. Her treating psychologist opines that her problems,
Have been maintained and severely aggravated by the continuing difficulties that she has been experiencing with her automobile insurer. Given that [she] was already vulnerable as a result of the consequences of her accident, … her insurer’s treatment has greatly affected her psychologically. More specially, Royal and Sun alliance has acted in a manner that is inconsistent with the opinions of numerous health professionals. Her income replacement was stopped in November 2003 despite numerous reports indicating that she was not competitively employable. A recent treatment plan for psychological treatment was denied despite the fact that every mental health professional she had seen had recommended ongoing psychotherapy…. her insurer has accused her of possibly committing fraud. [Her conflict with the insurer] has caused an increase in psychological symptoms with accompanying reduction in function…. To summarize, in my opinion, Royal and Sun alliance’s treatment of [Jane Doe] has caused her significant psychological harm.
III. Prove your bad faith case at the Examination for Discovery Stage.
The most important stage of any bad faith litigation is the examination for discovery. It is crucial to try to avoid having professional witnesses testify for insurance companies. I make it my practice to require production of the Affidavit of Documents with productions before I will schedule Examinations. We look through the documents and attempt to locate the lowest ranking decision maker in the company. I often encounter significant hostility with this process, but it is worth it in the long run.
When examining the decision maker, be sure to ask all the general questions about claims handling, training, manuals, company processes etc. In addition, it is worth digging through the file and asking questions to see if the adjuster understands the specific issues related to your client’s case.
I have examined adjusters, for instance, who know nothing about Ontario or Canadian Law. It is worth finding out if the adjuster knows anything about the test for Canada Pension Plan disability benefits. I am surprised by how often insurer’s state for the record that they have no idea of the test for CPP even though they have required their own insured to apply for this benefit.
Go over each and every document in the Affidavit’s with the adjuster. Find out if there is an inherent bias in the process: do they only use “preferred service providers?” are they working from company directives? do they fully understand why they cut someone off? I recently examined an adjuster who terminated benefits of my client because a transferable skills analysis said there was available work for him within his “geographic region:” however, the adjuster had no idea whatsoever of what that phrase meant. In other words, she was blinding accepting the report of her preferred service provider to terminate benefits even though she did not understand the report itself.
IV. Use lay witnesses to build your bad faith case.
Plaintiff’s lawyers commonly use lay witnesses to attempt to bolster the claim that the Plaintiff is disabled. Lay witnesses are also invaluable in building the claim for aggravated and consequential damages. Lay witnesses can often give irrefutable evidence showing how an insurer’s unreasonable denial of benefits has caused great suffering and harm to vulnerable individuals who are often in no condition to advocate for their own rights.
To conclude, there is little doubt that aggravated and consequential damages will always remain the poor cousin when compared to punitive bad faith awards. Aggravated and consequential bad faith claims will generally be smaller than bad faith awards, but there is every indication to believe, that if these claims are properly developed, they may be much more common than punitive awards. Based on a review of the jurisprudence, it may be argued that the judiciary is more favourably disposed towards aggravated and consequential bad faith claims than towards punitive claims.
1 I would like to acknowledge the assistance of Joyce Chun of my office who provided research to assist with this paper.
2 For an excellent discussion of these two cases, see the paper prepared by Alf Kwinter, “The Jury Awards in Plester and Mazza or How I Leaned to Love London and St. Catharines” (Canadian Institute, 2004).
3 (1999), O.R. (3d) 581,  O.J. No. 893 (Ont. C.A.).
4  O.J. No. 5580 (0.S.C.).
5 , O.J. No. 3588 (Ont. C.A.)
6 Ibid., paragraph 86.
7Ibid., paragraph 87.
8 Plaintiff’s lawyers should take note of Weiler,J.A.’s dissent where she notes:
9  O.J. No. 2252 (Ontario Divisional Court, Cunningham, Kurisko, Matlow, June 4, 2003).
10 Note that Kurisko,J. dissented on the basis that he felt losing your possessions and your home and being forced to raise your children in poverty was irreparable harm in his opinion.
11 Gruenberg v. Aetna Ins. Co., Cal. S.C., 1973.
12  O.J. No. 866 (Ont. C.A.) [emphasis mine]
13 Consider, for instance, Continental Insurance Co. v. Almassa International Inc.  O.J. No. 1125 (Ont. S.C.) where MacFarland,J. declined to award bad faith damages despite a finding that “there was some conduct by the insurer that breached the duty of good faith. The evidence fell short of what required for an award of punitive damages.”
14 20 September 2002, Ont. C.A.
15 Ibid. (emphasis mine)
16  O.J. No. 866 (0.C.A.)
17 In Whiten, Gary Will found the most damaging evidence when examining the notes of the Pilot’s experts after they were called to the stand; similarly, Alf Kwinter was not aware of much of the bad faith evidence in Mazza until after the trial had begun.
18 (2000), 50 O.R. (3d) 696 (0.S.C.J.)
19 Ibid., paragraph 62.
20 Clarfield showed he paid over $40,000 in real estate agent commission and had to move twice in a very short period of time.
21  N.J. No. 217 (N.S.C., T.D.)
22 Ibid., paragraph 86.
23 Ibid., paragraph 133. To be more specific, Justice Adams ordered solicitor/client costs up to the date of the trial of the remaining issues outstanding at the commencement of the trial. It is worth noting, however, that even though he was convinced that the company would do the same thing today and has likely done the same thing to others in the past, and that the conduct was harsh and outrageous, he concluded that aggravated damages were sufficient to send the proper message to Maritime Life and he declined to award punitive damages.
24 See Morin v. Maritime Life Assurance Co.  N.B.J. No. 103 (Q.B.) for an example where the unsupported pleadings were struck.
25 In Plante v. Industrial Alliance Life Insurance Co. 12003] O.J. No. 3034 (Ont S C) claims against the adjuster and examiner where not allowed to be added as there was no allegation that they were acting outside of the scope of their employment or that there was a chance of them being held personally liable.
26 In Plante, supra, Master MacLeod specially disapproves of a draft pleading that lumps punitive and exemplary (i.e., aggravated) damages together.
27  O.J. No. 354 (Ont. SC, Master Kelly)
28 Note that directives or procedural memoranda specific to the claim were ordered produced.
29 Note that real estate fees and losses were significant aggravated damages claims in both Clarfield and Fowler, supra.
30 Warrington v. Great West Life (1996), 139 D.L.R. (4th) 18 (BCCA); Asselstine v. Manufacturers Life  B.C.J. No. 1692 (B.C.S.C.)