A brief visit to the Insurance Bureau of Canada website reveals a world fraught with danger, and a country being entirely overtaken by rampant insurance fraud. According to the site, Garry Robertson, the National Director of Investigative Services for the IBC, has alleged that “[a]uto insurance fraud is a serious crime that costs Canadians billions of dollars each year… it’s an illegal, organized big business, largely unknown to consumers, that siphons resources away from our health care system, ties up our emergency services and courts, and drives up insurance costs”1 . IBC frequently cites this pattern of fraud as it lobbies government for “reforms” to Ontario auto insurance. Interestingly – and, in our view, tellingly – these frightening references, which ably paint a picture of a society run amok and whole-heartedly abusing its insurance system, are entirely unsubstantiated. It is unknown and unclear from where Mr. Robertson obtained the absolutely alarming notion that insurance fraud is a multi-billion dollar industry in Canada each year. It is particularly troubling that such statements are being made in a total absence of any acknowledgment that, all too often, insurance companies will go to any lengths to wrongfully deprive Canadians of “billions of dollars” of insurance coverage for which they have paid, and to which they are rightly entitled. Frankly, there is blame on both sides.
The bottom line is this: if no citizen ever engaged in insurance fraud, then insurance companies would not need investigators. Conversely, if insurance companies always behaved with benevolence and good faith, or even if they simply fulfilled their job duties properly, then personal injuries lawyer would not exist, because they would not ever be necessary, either. In order to overcome the issue of insurance fraud, both sides must acknowledge their own wrong-doing, and we must all work together to counteract the bad actors.
The relationship between insurers and their insureds is a unique one in Canada because many types of insurance contracts2 are “peace of mind contracts”, which are intended to provide insured with safety and security in the face of an uncertain future. The courts regularly describe the relationship as being one of “utmost good faith”3 which demands that both parties behave toward one another in a manner demonstrating that good faith. The bar is high, as the cases discussed herein will demonstrate, and the obligation goes both ways – as much as an insurer is bound to process all insurance claims with this duty in mind, so too must insureds advance their claims in the same manner.
This paper will examine the issue of insurance fraud in three segments: the good, the bad and the ugly. The “Good” section will discuss cases where an insurance industry acted appropriately and utilized surveillance and other tools advantageously, but not abusively. The “Bad” section will discuss cases where an insurance company went awry and exceeded its authority, requiring court sanction to correct the offensive behaviour. The “Ugly” section will review particularly egregious examples of both insurance companies and insureds committing fraud.
I. THE GOOD
Fancy v Mutual of Omaha Insurance Co.4 involved a plaintiff, Fancy, who suffered injuries in a fall in February of 1985, following which he was paid partial disability payments until October of 1985, and total disability benefits from then until April of 1987. On April 1, 1987, after Mutual of Omaha cut off his benefits, Fancy sued to have them continued. By the time of trial, medical records reviewed by the court indicated that by March 1, 1990, Fancy was able to return to work. For this reason, by the time of trial Fancy sought only disability payments for 35 months – from April 1, 1987, when Mutual of Omaha ceased payment of the benefits, and March 1, 1990, when he was officially medically cleared to return to work.
The court noted that, where the insurance company is paying benefits for a period of time and then decides to stop doing so, it must prove that the insured is no longer disabled. To that end, Mutual of Omaha introduced the existence of videotaped surveillance evidence which showed Fancy apparently moving and behaving in a manner inconsistent with the pain he alleged he was experiencing. By the time he was examined for discovery, Fancy had been under surveillance at Mutual of Omaha’s request on numerous occasions, although Fancy himself was entirely unaware. The insurer felt that some of Fancy’s comments and answers during the examination were – at the very least – less than honest, given the depictions of the videotape. Five days after his examination for discovery, Mutual of Omaha advised Fancy of the existence of covert surveillance, and at some later point it was fully disclosed to Fancy and his counsel. Regardless of this evidence, Fancy continued to pursue his claim.
At trial, the court was satisfied that the mere existence of video surveillance which appears to be at odds with an insured’s assertions of injury is insufficient to substantiate a decision to cease benefit payments without corroboration. The video surveillance should have been referred be medical professionals who could make sense of the evidence in light Fancy’s diagnoses, ideally after examining or at least observing Fancy themselves.
For that reason (i.e.: the insurance company’s utter lack of evidence that Fancy was in fact no longer injured on any date before they conducted surveillance), the insured could be presumed to have been sufficiently injured on any date up to the date of the surveillance, at which point it was rather clear that he was not as injured as he claimed.
31 There was no direct evidence as to the reason the defendant terminated the disability payments on April 1, 1987. It may be inferred from the suspicions expressed by Drs. McKenna and Khan, as previously noted, that the defendant was equally suspicious. But suspicions do not constitute proof that the plaintiff was no longer totally disabled. Nor is it permissible, without additional evidence, to conclude that the normal physical condition of the plaintiff as revealed in the videotapes in September 1987, existed as of April 1, 1987, or even at any particular time prior to the surveillance. Thus, the plaintiff is entitled to recover from the defendant disability payments for the 5-month period from April 1, 1987, until his fraud was discovered on September 2, 1987 — a total of $5,000.
33 The existence of the videotape was disclosed to the plaintiff on October 21, 1987, 5 days after the plaintiff was examined for discovery by the defendant. At some subsequent date, the plaintiff was also provided with a copy of the videotape.
34 The plaintiff was, therefore, fully aware, as of October 21, 1987, that he had been “set up” at his examination for discovery. Many of the answers to questions, based on activities of the plaintiff disclosed in the videotape, were patently false. Nevertheless, the plaintiff pursued his claim in full. To succeed, it would have been necessary for the plaintiff to deceive the Court to the extent he deceived his family physician. The attempt to deceive the Court cannot justify any award of costs to the plaintiff.
35 The defendant amended its statement of defence on June 1, 1988, by alleging that the plaintiff had fraudulently misrepresented to the defendant the extent of his injury in an attempt to induce the defendant to make payment under the insurance contract. The defendant’s pre-trial conference brief, dated December 5, 1990, a copy of which was made available to the plaintiff, contains extensive reference to the videotape and to questions asked of the plaintiff during his examination for discovery and the manifestly untrue answers to those questions. The brief contains full particulars of the alleged fraud. Those particulars were established at trial.5
Even though the way the insurer went about things in the case was fumbled, still, the insurance company did attempt to do the right thing by ceasing payment to someone who appeared to be blatantly violating the rules.
The insured’s attempt to defraud the insurer in Harris v Home Trust Co.6 similarly failed, although the circumstances were quite different. The plaintiff, Harris, lost his home in a power of sale proceeding. He was assigned a deadline by which he had to retrieve any of his belongings remaining on the premises, but he failed to make the deadline. He subsequently arranged to retrieve his belongings, but found that at least half of his possessions were either damaged or entirely missing. He filed a property loss claim with Home Trust Co., with whom he had a theft insurance policy covering household goods. The property loss claim included a claim for an abandoned boat, which Home Trust rejected. Harris commenced a claim seeking damages for breach of contract, while the insurance company sought, and received, summary dismissal of the claim.
Harris admitted at trial that in fact he had abandoned his boat some time earlier and that it had been pushed downstream by ice. Therefore, his claim to the insurer had been entirely fraudulent, according to the definition of “fraud” accepted by the court:
17 The classic definition of fraud is set out in Peek v. Derry (1889), L.R. 14 App. Cas. 337 (U.K. H.L.) where it is described as an essential element in the tort of deceit:
…fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false….7
The court also commented on the need for any misstatements to be “material” when dealing with insurance fraud cases in particular:
18 In Skuratow v. Commonwealth Insurance Co., 2005 BCCA 515 (B.C. C.A.) CanLII, the British Columbia Court of Appeal applied this definition to false representations made by an insured to his insurer. It also held, at par. 22, that the incorrect statements made by the insured must be material, meaning that they “had the capacity to affect the mind of the insurer either in the management of the claim or in deciding to pay it.” 8
Importantly, the court also commented on the duty of utmost good faith owed by insurers to their insureds, and acknowledged that the duty is reciprocal, and therefore if any part of an insurance claim is found to have been fraudulent, so the whole claim goes unrecognized:
20 An insured owes a duty of utmost good faith to an insurer. The insurer is likewise duty-bound to the insured. As the statutory conditions to the Insurance Act provide, a fraudulent or wilful false statement in the making of an insurance claim vitiates the claim of the person who makes the fraudulent statement. The Ontario Court of Appeal made this finding in Alavie v. Chubb Insurance Co. of Canada,  O.J. No. 776 (Ont. C.A.).
24 In my view, this case is on the same legal footing as the Alavie case. The plaintiff admitted his boat was not stolen. He knew that it sunk but decided the insurer should pay to replace it anyway. It is a significant part of the claim. When the plaintiff submitted his proof of loss and included the boat in it, he made a fraudulent insurance claim that results in no recovery under the insurance policy. He has vitiated coverage under the entire policy. He cannot now expect the insurer to pay partial recovery in the face of the common law rule.9
Another example of blatant attempted fraud is found in Kursar v BCAA Insurance Corp.10, where the plaintiff claimed that over $100,000 worth of his property had been stolen from his apartment during a break and enter that occurred while he was in Europe. The insurance company’s investigation revealed that much of the documentation substantiating the claim was in conflict, in addition to which it was noted that nothing belonging to the plaintiff’s roommate was taken during the alleged robbery. When Kursar sued BCAA for breach of contract for failing to honour his property loss claim, BCAA sued him right back for repayment of monies already shelled out in advance of the claim being determined to be fraudulent. The court quickly threw out Kursar’s claim for coverage, and allowed BCAA’s claim to have Kursar reimburse it for the $50,000 it had already paid him. Further, the court awarded BCAA the costs of its investigation, as well as special costs and potentially punitive damages (a matter which was reserved for further argument).
Rushton v Economical Mutual Insurance Co.11 involved a claim for long term disability benefits by Rushton, who asserted that he had suffered injuries in a motor vehicle accident which had left him entirely unable to work at any occupation. To counter the claim, the insurer produced video surveillance evidence which appeared to show Rushton moving without difficulty and engaging in activities in which his doctors had indicated he would be unable to participate, given the limitations associated with his injuries.
Importantly, Rushton’s claim included a diagnosis of chronic pain, which the court noted is something which cannot be objectively, quantifiably measurable in any meaningful way. In other words, everyone, including physicians treating the patient, must take the word of the patient for how much pain he is experiencing; there exists no test to prove or disprove the patient’s statement. One of the treating physicians in this case testified that, where chronic pain diagnoses are involved, “[doctors] tend to believe people until we have grounds to disbelieve”12. Here, the court found that the surveillance evidence introduced by the defense provided grounds for such disbelief, particularly when taken in concert with the fact that Rushton’s own treating physician had expressed some doubt about the validity of the severity of Rushton’s’ pain.
79 The third major problem with the plaintiff’s case is the devastating evidence of the surveillance conducted by LeBlanc. This testimony, and the photographs and video filed as exhibits, lead me to the inevitable conclusion that at times the plaintiff clearly misrepresented his condition and the level of his disability. This evidence, in my view, depicts a person who, generally, is able to walk and function without apparent difficulty, but who at other times, specifically only when entering and exiting the Moncton Medical Clinic, appears to be unable to walk without the aid of a walker and then seems to have to visibly drag the left foot. In my opinion, the plaintiff’s explanation for his use of the walker on those occasions is not credible. He claims to have suffered back spasms. However, the video clearly depicts a person who is having no apparent difficulty whatsoever moving about, taking a walker from the rear of the van and moving it to a position between the driver and front passenger seats. He either was anticipating the on-set of a back spasm or, and I find this more likely, was preparing to use the walker to enter and exit the Back Clinic. This view is supported by the testimony of Ms. Rushton who stated that in 1994 the plaintiff was “coming along pretty well”. She did not mention that the plaintiff needed a walker in 1994. There is also support for this view in the testimony and evidence presented by Ms. Steeves who identified a number of inconsistencies in the plaintiff’s presentation at the Back Clinic, leaving some questions as to the reliability of the plaintiff reporting of his condition. This leads to the fourth major problem with the plaintiff’s case, the evaluation of July 13 and 14, 1994.
86 I find there is little or no objective evidence to support the plaintiff’s claim of entitlement to Schedule B benefits. The credibility of the plaintiff’s claims as to his continuing disability is so questionable that his subjective assertions are unreliable. In the result, I find the plaintiff has not established by convincing evidence on a balance of probabilities that the injury he sustained in the motor vehicle accident of November 15, 1992 continuously prevents him from engaging in any occupation or employment for which he is reasonably suited by education, training or experience. Consequently, the plaintiff’s claim against the defendant is dismissed.13
Here, investigators hired by the insurance company did an excellent job in providing a report that clearly demonstrated the lie in the Rushton’s claims: not just that Rushton was observed and recorded, but that he behaved in different manners, at different times. For example, only using a walker on days he was attending medical appointments, and otherwise never demonstrating a need to use one, and climbing things and lifting things beyond his capabilities were all well demonstrated in the surveillance. Moreover, as the court acknowledged, Rushton’s own treating doctors were suspicious of him and did not entirely believe him to be a reliable narrator of his own symptoms. Taken in concert, the court really had no choice but to throw out Rushton’s claim.
II. THE BAD
In the old case of Johal v National Life Assurance Co. of Canada14, the insured, Johal, had a disability insurance policy with the defendant, National Life Assurance Co. of Canada. The policy entitled Johal to total disability benefits for a “medically determinable physical or mental impairment, as prevents the employee from performing any and every duty of any occupation or employment”15. Although Johal had received benefits for a number of years for being disabled from carrying out the duties of his own job, he would have to be considered medically unable to pursue any job at all if he were to be entitled to such benefits. Johal had been diagnosed as suffering from chronic anxiety disorder with depressive features and a paranoiac disorder, illnesses for which he had been receiving benefits for several years, until National Life cut them off. This prompted Johal to commence his claim seeking a declaration that he was, at all relevant times, entitled to total disability benefits. The insurance company defended the claim by asserting that Johal had faked his illness, in whole or in part, and was not entitled to any benefits.
It must be noted at this point that, when an insurer has been paying its insured benefits for a period of time, and then decides to stop, it is that insurance company which bears the burden of proving that the insured is no longer disabled and thus, not entitled to benefits. In other words, something must have medically changed in order to cease making the benefits, and it is the insurance company which must demonstrate that the insured’s health has improved such that they no longer require or are entitled to further benefits.
National Life appeared to take the position that since Johal had at some point relocated to Florida without first advising them, therefore he must have been engaged in a fraudulent scheme against the insurance company, and therefore he was not entitled to any benefits. This despite the fact that, as National Life eventually acknowledged, nowhere in its policy was it required that an insured report a change of address to them. The court found that Johal was, in fact, totally disabled:
26 The Defendant submits that Johal had an intention to move to Florida and to put it as nicely as I can, that he entered into a course of conduct which would indicate that he was disabled. Therefore, he deceived his two psychiatrists and had no intention of ever returning to work. Instead, he loved the Florida lifestyle with his wife essentially “keeping” him. Incidentally, he managed to lose quite a bit of his wife’s money as he exhibits from his so-called occupation as an investment advisor. There is no doubt that there is considerable suspicion about the intentions of Johal. There is also no doubt that the Defendant decided sometime before they discontinued the payments to the Plaintiff that they would do everything in their power to build up a record that indicated that Johal was a complete fraud. The surveillance which is in evidence, the investigation by Mr. Zion, who was also employed by the same company which did the electronic surveillance, Equifax, are some indication of the modus operandi of the Defendant [emphasis added].
On all the evidence, I reject the submissions of the Defendant that the Plaintiff and anyone who was in concert with him was guilty of fraud. In doing that, I am conscious of the fact that the mental condition of the Plaintiff was such that his actions at times were not completely rational.16
Importantly, the court specifically found in this paragraph of the ruling that National Life decided it did not want to pay Johal any longer, and then endeavoured to conduct an investigation that would support this conclusion. Obviously, the correct way to conduct an investigation is to gather all of the facts and evidence, review same with an unbiased eye, and draw conclusions based upon the synthesis of all the relevant information. One should not begin with a conclusion, then attempt to support that conclusion by any means necessary.
In fact, behaving in such a manner may end up costing the insurance company money. There are a number of ways the court might punish the insurance company for bad behaviour, including awarding aggravated or punitive damages, or, as in this case, addressing the issue as a matter of costs. The court awarded Johal solicitor and client costs (a rarity), as a consequence of Johal’s bad behaviour:
38 The intent of this Rule is clear, that if you allege fraud, you should be able to prove it. I will not get into the onus and whether or not it is a criminal onus in such a case because in this litigation it is not necessary. A number of authorities were given to me about pleading fraud and whether or not solicitor and client costs should be awarded. In this case, I agree with the remarks of Mr. Justice Potts and I award the Plaintiff solicitor and client costs in which are included all necessary expenses for the Plaintiff and Dr. de Elejalde to travel from Florida and incidental expenses in the City of Ottawa.17
Basically, that means that the insurance company had to pay a huge portion of the legal costs Johal had accumulated in bringing the case, because everything could have been avoided if the insurance company had just carried out it’s duties – properly – in the first place. Surveillance should not be used to justify a decision to terminate benefits that have already been paid. Surveillance should be a tool to determine whether the benefits are properly payable or not.
The seminal 2006 Supreme Court of Canada decision Fidler v Sun Life Assurance Co. of Canada18 provides an example of a different type of punishment – the award of aggravated or punitive damages to the insured person, in an effort to compensate for the insurer’s bad behaviour. The case involved an insured person who had been diagnosed with chronic fatigue syndrome and fibromyalgia, as a result of which she was receiving long-term disability benefits. These particular diagnoses have long been an area of concern for the insurance industry, with many companies consistently arguing that such disorders do not exist, or are not based on recognized and approved medical science. Despite strenuous effort on the part of the insurance industry over a course of years, these illnesses are currently recognized as such by Canadian medical science as well as the broader medical community.
Sun Life paid Fidler benefits for many years, until it sent her a letter in May of 1997 indicating, “that “as a result of a non medical investigation revealing that your activities are incompatible with your alleged disability”, benefits payments would be terminated”19. Sun Life’s non-medical investigation essentially comprised video surveillance it had conducted in September of 1996 and a questionnaire that Fidler had filled out at Sun Life’s request. In the questionnaire Fidler indicated that she rarely went out and did not have many hobbies or enjoy many activities. In the surveillance video, Fidler could be seen entering and leaving her vehicle, driving, shopping and carrying out some of the tasks of daily living. According to an internal Sun Life memo, they determined that Fidler had been “active for 5 FULL DAYS!”20 Although, as the court pointed out, “surveillance was in fact conducted for about five hours on each of three days, and for one hour on a fourth day”21. Clearly, that does not equate to “5 full days”, and represents an overreach on the part of the insurer, which took this video as evidence that Fidler was not actually totally disabled.
For about two years after the decision to cut off her benefits, Sun Life and Fidler were in relatively constant communication, although Sun Life refused to accede to Fidler’s request that she be sent a copy of the surveillance video upon which Sun Life relied. Instead, Sun Life continued to maintain that Fidler was capable of some kind of work, despite the fact that her treating physician had confirmed to them as late as January of 1998 that Fidler remained totally disabled. Eventually Fidler underwent an independent medical examination by one Dr. Wade, who concluded that while Fidler was unable to work at that time, she could embark upon a graduated training program to improve her physical fitness, which would then lead to a graduated return-to-work program. Sun Life gave that report and its video surveillance to its medical consultant who, despite never having examined or even met Fidler, concluded that she was totally capable of working. It seems prudent at this point to remind that Fidler’s own treating physicians deemed her to be continually totally disabled, and that Sun Life did not have any medical evidence to the contrary.
Fidler commenced a claim against Sun Life and the matter was proceeding through the system when, only days before the trial was set to commence, Sun Life agreed to reinstate all of Fidler’s benefits and pay the amounts outstanding, including interest. The trial proceeded on the matter of Sun Life’s liability for aggravated and/or punitive damages and it was ultimately found to be liable for $20,000 in aggravated damages, but not liable for any punitive damages.
On the topic of aggravated damages, which in this case were awarded on the basis that Sun Life had intentionally caused Fidler mental distress, the Supreme Court made special mention of the unique relationship between insurer and insured, and noted that the basis of the insurance relationship is one of reassurance. In other words, people purchase insurance in order to feel secure, safe and protected from potential future detrimental events. Thus, an insurance company abusing its position by denying a person, for more than five years, the benefits to which she is entitled, is offensive behaviour that is worthy of sanction:
57 Mental distress is an effect which parties to a disability insurance contract may reasonably contemplate may flow from a failure to pay the required benefits. The intangible benefit provided by such a contract is the prospect of continued financial security when a person’s disability makes working, and therefore receiving an income, no longer possible. If benefits are unfairly denied, it may not be possible to meet ordinary living expenses. This financial pressure, on top of the loss of work and the existence of a disability, is likely to heighten an insured’s anxiety and stress. Moreover, once disabled, an insured faces the difficulty of finding an economic substitute for the loss of income caused by the denial of benefits. See D. Tartaglio, “The Expectation of Peace of Mind: A Basis for Recovery of Damages for Mental Suffering Resulting from the Breach of First Party Insurance Contracts” (1983), 56 S. Cal. L. Rev. 1345, at pp. 1365-66.
58 People enter into disability insurance contracts to protect themselves from this very financial and emotional stress and insecurity. An unwarranted delay in receiving this protection can be extremely stressful. Ms. Fidler’s damages for mental distress flowed from Sun Life’s breach of contract. To accept Sun Life’s argument that an independent actionable wrong is a precondition would be to sanction the “conceptual incongruity of asking a plaintiff to show more than just that mental distress damages were a reasonably foreseeable consequence of breach” (O’Byrne, at p. 24 of manuscript (emphasis in original)).
59 The second question is whether the mental distress here at issue was of a degree sufficient to warrant compensation. Again, we conclude that the answer is yes. The trial judge found that Sun Life’s breach caused Ms. Fidler a substantial loss which she suffered over a five-year period. He found as a fact that Ms. Fidler “genuinely suffered significant additional distress and discomfort arising out of the loss of the disability coverage” (para. 30 [emphasis added]). This finding was amply supported in the evidence, which included extensive medical evidence documenting the stress and anxiety that Ms. Fidler experienced. He concluded that merely paying the arrears and interest did not compensate for the years Ms. Fidler was without her benefits. His award of $20,000 seeks to compensate her for the psychological consequences of Sun Life’s breach, consequences which are reasonably in the contemplation of parties to a contract for personal services and benefits such as this one. We agree with the Court of Appeal’s decision not to disturb it.22
As for the punitive damage award, the court did review the components of a claim of punitive damage and noted that the true intention of such an award is one of punishment. Punitive damages are intended to compensate victims of egregious, high-handed, offensive behaviour, and to punish the perpetrator for behaving in such a manner. In this case the trial judge had not found punitive damages to be warranted because although Sun Life had not exactly behaved in an exemplary manner, nor had its conduct risen to the level of bad faith. The Supreme Court of Canada agreed and acknowledged that Sun Life’s conduct had been “troubling”, but ultimately concluded that the trial judge’s decision had not been unreasonable or in error, and therefore should be allowed to stand:
73 The trial judge’s conclusion that Sun Life did not act in bad faith was the product of a thorough review of the relevant evidence, and depended heavily on his appreciation of the basis on which Sun Life denied Ms. Fidler’s claim. He considered every salient aspect of how Sun Life handled Ms. Fidler’s claim, including those features that might be relied upon to suggest that Sun Life approached the claim obstructively or dismissively, but made no such finding.
74 Nor did the trial judge find an improper purpose on the part of Sun Life. The trial judge’s reliance, in particular, on the difficulty Sun Life had in ascertaining whether Ms. Fidler was actually disabled supported his conclusion that Sun Life did not act in bad faith and that, instead, its denial of benefits was the product of a real, albeit incorrect, doubt as to whether Ms. Fidler was incapable of performing any work, as required under the terms of the policy.
75 Sun Life’s conduct was troubling, but not sufficiently so as to justify interfering with the trial judge’s conclusion that there was no bad faith. The trial judge’s reasons disclose no error of law, and his eventual conclusion that Sun Life did not act in bad faith is inextricable from his findings of fact and his consideration of the evidence. As Ryan J.A. concluded in dissent:
The trial judge saw and heard the witnesses. He examined the written material filed as exhibits. It was for him to assess the evidence and to determine its weight and effect. In my view Ms. Fidler has not been able to demonstrate that the conclusions of the trial judge were unreasonable or palpably wrong. [para. 104]
The award of punitive damages, of course, does not depend exclusively on the existence of an actionable wrong. In Whiten, the Court clearly established the relevant factors to consider in determining whether or not an award of punitive damages is warranted. Absent bad faith in this case, however, there is no need to go further [emphasis added].23
Decisions may only be overturned on appeal if there was an error of fact or law at the trial level. In this case, the trial judge decided that Sun Life had not acted in bad faith, which meant that punitive damages were unsupported. The trial judge supported this decision with clear written reasons that demonstrated the judge had considered all of the appropriate legal principles in making the decision not to award punitive damages. Thus, so long as the decision is legally sound, the Court of Appeal is bound to let it stand, even if, as in this case, it disagrees with the conclusion of the trial judge. The initial opinion of the trial judge, which is influenced by a number of subjective factors, will generally govern the question of whether punitive damages ought to be awarded.
More recently, in the case of Iannarella v Corbett24, the court had occasion to provide something of a “roadmap” to insurance companies as to the proper way to conduct an investigation, including the appropriate use of surveillance. Following a motor vehicle accident with the defendant Corbett, Iannarella claimed to have suffered several injuries, including developing chronic pain which prevented him from working. The claim was dismissed at trial and Iannarella appealed on a number of issues, including the use made of surveillance video evidence at the original trial.
Specifically, any evidence obtained by any party in either side of a lawsuit must be disclosed to the opposing counsel prior to trial in an effort to avoid “trial by ambush”, whereby all parties prepare for trial, and then one party springs surprise evidence on an unsuspecting opponent at trial. (For those old enough to remember, some call that a “Perry Mason moment”.) In Canada we make every effort to avoid this kind of unfairness by demanding that the parties all exchange evidence before trial, so that everyone knows exactly what page they are all on. In this case, counsel for the insurance company did not tell the insured that they been conducting surveillance of him prior to trial, and then did not disclose any of that surveillance to opposing counsel. Despite this violation of our justice system, the trial judge allowed the insurance company to use the surveillance evidence against the insured at trial. On appeal, the Court of Appeal noted that surveillance video in particular is deserving of pre-trial disclosure because of the inherently powerful nature of such evidence:
44 Pre-trial disclosure of surveillance in a personal injury action is particularly important since “the impact of video evidence can be powerful.” (Landolfi, at para. 52) Disclosure also provides the parties with the opportunity to carry out a realistic assessment of their positions and therefore facilitates settlement. Justice Hambly explained the important role of disclosure in Arsenault-Armstrong:
The surveillance evidence will assist the plaintiff in evaluating the strength of her case and arriving at her settlement position prior to trial. Even if the defendant will not be able to use the surveillance evidence for impeachment purposes, as a result of its non-disclosure, the defence will gain knowledge of the plaintiff from the surveillance evidence which it will be able to use to its benefit. (Para. 11)
45 However, the surveillance evidence can only serve to encourage settlement if it is disclosed in the affidavit of documents and the opposing party has the opportunity to seek particulars at examination for discovery. Here, for example, the appellants did not accept a substantial settlement offer; perhaps they would have accepted it, thus avoiding a lengthy and costly trial, had the respondents properly disclosed their surveillance evidence.
92 Trial judges recognize that surveillance evidence is powerful evidence, as Cronk J.A. acknowledged in Landolfi. Mr. Forget submitted to this court in argument that the surveillance evidence was not “that damning”, and “not great surveillance”. However, in argument to the trial judge, he more candidly asserted that it was “powerful evidence.” The power of surveillance comes from its nature as “real demonstrative evidence — evidence from which the trier of fact can draw factual conclusions”, as John A. McLeish and Roger G. Oatley note in The Oatley-McLeish Guide to Demonstrative Advocacy (Markham: LexisNexis, 2011), at pp. 249-50.25
The result of the insurance company’s attempt to first engage in surveillance for no apparent reason, then hide that surveillance from the insured, then make use of it regardless at trial, was that the court concluded this had given “rise to a form of trial by ambush” which could not be corrected, which meant that the insurance company lost the case. Perhaps, had the insurance company been more forthcoming (i.e.: followed all of the applicable rules) instead of trying to scam its insured, then it would not have lost the case.
III. THE UGLY
Adams v Confederation Life Insurance Co.27 provides an example out of Alberta. The insured in that case, a nurse, had worked full-time until her diagnosis of depression and fibromyalgia, which necessitated her taking leave from work. She was paid disability leave benefits for two years, during which time she purchased a bookstore, where she worked for about four hours each day. Adams received disability benefits for two years, until Confederation Life Insurance Co. terminated all benefits. A discussion ensued between the parties wherein Confederation agreed to consider Adams’ work at the bookstore to be “rehabilitative”, and therefore Adams herself still disabled. Confederation agreed to adjust the benefits it was paying Adams in light of the income she was earning at the bookstore. Under the agreement the parties arrived at, Adams was obligated to provide medical confirmation of her disability to Confederation every six months and to notify them if she was no longer able to work four hours each day, while Confederation agreed to pay Adams her disability benefits until she turned 65, so long as the conditions of disability were satisfied. Two years later Confederation received the results of a surveillance report on Adams that Confederation had engaged a private investigator to provide, and on the basis of that report it once again terminated Adams’ benefits. That decision formed the basis of this lawsuit, as Adams sued to have her benefits reinstated.
Adams’ claim was allowed by the court, which had little difficulty in finding numerous problems with Confederation’s surveillance of her. In particular the court noted that the insurer relied upon video taken from outside of the bookstore for a period of a week. While it showed Adams’ comings and goings, it did not depict whether she was actually working during the hours she spent at the store; the court found it was a mistake for Confederation to equate attendance at the bookstore Adams owned with her necessarily working during those same hours. Further, the surveillance evidence had not been reviewed by medical professionals who would have been able to put what was recorded into context. Given all of these errors, the video surveillance was effectively useless and provided no evidence to substantiate Confederation’s decision to cut off Adams’ benefits:
46 To prove these alleged breaches the Defendant chose to rely on the surveillance evidence alone. Realistic assessment of that evidence demonstrates that it falls far short of proving on a balance of probabilities that the Plaintiff breached the rehabilitation agreement. The most obvious error of both reports is that they equate attendance at the book store with hours of work. None of the investigators were in the store to determine if the Plaintiff was, in fact, working, except for three or four very short interludes. Most of the surveillance was conducted from vehicles parked outside the store with totally inadequate visibility of the activities going on in the store. There are no exact details on the attendances of the staff or even their arrival and departure from the store.
47 The Sharpe investigation is highly questionable as to accuracy and detail because of its limited surveillance and because it alleges the Plaintiff was at work for 2 days when she was not there at all. The evidence of Doreen Al-Adra, which I accept completely, conclusively proves that point.
48 The insufficiency of the second surveillance is proven beyond any doubt by the video tapes taken by Mr. Hale. The video tapes, taken mostly from within a motor vehicle parked near the front of the book store, are mute but graphic evidence of the ineptness and inadequacy of the surveillance conducted of the Plaintiff by this investigator. They prove the limited observations of the Plaintiff during the term of surveillance. They reveal nothing of the activities within the store or who is on duty. The video of the school Book Fair shows the Plaintiff seated at a table and speaking to the odd person. Mr. Hale’s observations and inquiries of the school authorities add some detail but are inconclusive as to hours worked or duties performed.
49 Neither of these reports nor the videos were shown to medical experts for assessment, and it is obvious why that was not done. They reveal nothing that would provide a basis for evaluation. Nor were the two surveillances of the Plaintiff long enough on which to base an accurate assessment of her ability to work in excess of 4 hours per day or 16 hours per week on a consistent or any basis.28
The court’s most important comments arose during its finding that Confederation had violated the duty of utmost good faith that it owed to Adams in conducting surveillance of her in the first place. As the court points out, once the insurer has made the decision to provide coverage to its insured, that act alone is a tacit acknowledgment that the insurer accepts the claim of the insured. To then engage in covert surveillance of the insured in an effort to undermine its own decision is unnecessary and unmerited, and supports the conclusion that the insurer has violated it’s duty of utmost good faith:
72 Did the actions of the insurer in this case amount to a breach of its duty of good faith under the principle of uberrima fides? My answer is “Yes”. The decision to embark on covert surveillance without reason or cause is obvious on the facts. By this, I do not mean to be taken as saying that surveillance is an improper investigative technique for insurers to prove an unmeritorious claim. But in this case, and in these circumstances, the Defendant had accepted the claim and had committed to a course of dealing under the policy which required it to deal fairly with the Plaintiff. It did not. Medical certificates were provided as required under the rehabilitation agreement. The Defendant had requested and received additional medical information from the attending physician. It did not exercise its right to an independent medical examination in July of 1992 as provided by this agreement. No inquiry or request was made of the Plaintiff to provide any certification of hours worked. It simply launched an unwarranted and unmerited investigation without reason by its own admission. It acted solely on the basis of two totally inadequate investigative reports. That is illustrated by the medical assessment of her condition, her limitations and the medical recommendations that the tasks at her bookstore were appropriate rehabilitative work. Recognizing the effects and physical and emotional limitations of her condition, hours in attendance in the bookstore do not automatically equate to hours worked. Her position as partner/owner permits the Plaintiff flexibility to choose her tasks, initiate rest periods and work absent the stress of an employer/employee directed regimen. This was the essence of the occupational assessment by Dr. Corbet.29
This court in this case clearly articulates that insurers should not as by rote be conducting surveillance of every insured that makes a claim. In particular where the insurer has found the claim to have merit, for which reason it is being honoured, the insurance company should not engage in baseless surveillance of people who are doing nothing wrong. What a waste of Confederation’s resources this case turned out to be.
In the more recent Ontario decision Brandiferri v Wawanesa Mutual Insurance Co.30, the Brandiferri’s had suffered a loss of some possessions and smoke damage to others as a result of a fire that occurred in their garage. Remediation work undertaken on behalf of the insurance company was inadequate and incomplete, causing the Brandiferri’s to sue not only the company that undertook the actual remediation but also their insurer, Wawanesa, which was ultimately responsible for the work of the builder. In response to the claim against Wawanesa and the remediation, Wawanesa counterclaimed against the Brandiferri’s alleging fraud.
Careful consideration of all of the testimony given at trial led the court to allow the Brandiferri’s claim for coverage. On the topic of Wawanesa’s allegation that the Brandiferri’s had committed fraud, the court reviewed the law respecting making of fraudulent insurance claims, and noted that Wawanesa needed to prove that the Brandiferri’s had made an intentionally false statement in making their initial insurance claim:
186 The law is that if the claimant makes an “intentionally false claim” the claim should be dismissed: Daver v. Chubb Insurance Co. of Canada,  O.J. No. 3164 (Ont. C.A.) at para. 3-4. A false statement will violate statutory condition 7 if it is made knowingly, without belief in its truth, or recklessly without caring whether it is true or not: Voloudakis v. Allstate Insurance Co. of Canada,  O.J. No. 354(Ont. Gen. Div.) at para. 65, 68-9. The intention to mislead can be inferred from even a small or proportionally small breach: Fotinos v. Pitts Insurance Co.,  O.J. No. 224 (Ont. H.C.) at paras. 14-15, Montini Foods Ltd. (Trustee of) v. General Accident Insurance Co. of Canada,  O.J. No. 1333 (Ont. Gen. Div.) pages 13-15.31
In this case, the court found five reasons to support it’s tossing out Wawanesa’s counterclaim, including that while the Brandiferri’s could be suspected of exaggeration, that is not the same as outright lying, and that Wawanesa knew that the value of at least one item was exaggerated, but they paid the claim out anyway. Importantly, one of the reasons cited by the court was that it found the late-in-the-game assertion of fraud by Wawanesa to be opportunistic and “more a product of legal strategy than factual reality”32. This point is important and should not go unremarked upon because it recognizes the reality that insurance companies sometimes attempt to manipulate the court system in an effort to alleviate their responsibility to pay legitimate claims.
In this case, Wawanesa appears to be aware that it is entirely unlikely that the Brandiferri’s committed fraud, given that they truly had no evidence of any such act on their behalf, but they pursued the strategy of countersuing the Brandiferri’s in an effort to drain them of resources so that Wawanesa would not only not have to pay their claim, but it would be absolved of the problem of the Brandiferri’s legitimate insurance claim. The court noted that this blatant violation of the duty of “utmost good faith” is particularly disgusting because it demonstrates the insurer’s abuse of its power over individual insureds who are outmatched by powerful insurers in every way:
212 Part of an insurer’s duty of utmost good faith in investigating, assessing and attempting to resolve claims must attach to the insurer’s litigation strategy against the insured when the claim is disputed. This does not mean, as O’Connor J.A. noted in 702535 Ontario Inc., that the duty of good faith forces an insurer to be correct in making a decision to dispute a claim (at para. 30), and see Fidler v. Sun Life Assurance Co. of Canada,  2 S.C.R. 3 (S.C.C.) at paras 63, 71. But the insurer may not abuse its financial power, knowing that the insured, “having suffered a loss, will frequently be under financial pressure to settle a claim as soon as possible” (702535 Ontario Inc., at para. 28).
213 The fraud allegation was late breaking and was only made after the action was started in the Statement of Defence and Counterclaim. I find this to have been a high-stakes litigation strategy designed to intimidate the Brandiferri’s. I do not accept Mr. Phin’s evidence that he concluded early that the claim was fraudulent. Nothing in Wawanesa’s written record or the conduct of its personnel corroborates that assertion. His self-serving evidence on that issue, in the context of all of the information available to all of the participants and their pattern of conduct in adjusting the claims including the garage claim, simply does not bear scrutiny.
214 I accept that Wawanesa is a repeat offender and ought to be punished significantly. That said, punitive damages ought to be proportional. I fix punitive damages in the amount of $100,000.00 to be paid by Wawanesa to the Brandiferri’s.33
While $100,000 in punitive damages is not much, particularly for such a large corporation, courts have demonstrated willingness in recent years to increase punitive damages to reflect the outrage of society in general at the behaviour of behemoth corporations, including insurance companies.
One such example is Zurich Life Insurance Co. v Branco34, a 2015 decision out of the Saskatchewan Court of Appeal that saw punitive damages of $500,000 awarded against Zurich Life Insurance Co. and $175,000 in punitive damages against AIG, the two insurers involved in this case, each of whom had behaved egregiously in refusing in consider the plaintiff’s claim for nearly a decade. While $175,000 and $500,000 are indeed large sums of money, it should be noted that these amounts were reduced from the original $1.5 million and $3 million, respectively, which the trial judge had awarded in this case. This points to an increasing comfort with massive punitive damage awards, such as those awarded by our American neighbours, which in turn should give insurance companies pause to consider their behaviour, or, at the very least, incentive to behave in an appropriate manner.
See also Clarfield v Crown Life Insurance Co.,35 where the insurance company, Crown Life, terminated Clarfield’s disability benefits after two years, without explanation and without any change in Clarfield’s health (i.e.: he remained totally disabled). The court found Crown Life’s behaviour to violate its duty of utmost good faith owed to Clarfield, and specifically noted that this duty encompasses an obligation on the insurer to promptly and fairly investigate, assess and resolve claims:
27 The relationship between an insurer and an insured is contractual in nature. The contract is one of utmost good faith. In addition to the express provisions in the policy and the statutorily mandated conditions, there is an implied obligation in every insurance contract that the insurer will deal with claims from its insured in good faith: Whiten v. Pilot Insurance Co. (1999), 42 O.R. (3d) 641(Ont. C.A.). The duty of good faith requires an insurer to act both promptly and fairly when investigating, assessing and attempting to resolve claims made by its insureds.
28 The first part of this duty speaks to the timeliness in which a claim is processed by the insurer. Although an insurer may be responsible to pay interest on a claim paid after delay, delay in payment may nevertheless operate to the disadvantage of an insured. The insured, having suffered a loss, will frequently be under financial pressure to settle the claim as soon as possible in order to redress the situation that underlies the claim. The duty of good faith obliges the insurer to act with reasonable promptness during each step of the claims process. Included in this duty is the obligation to pay a claim in a timely manner when there is no reasonable basis to contest coverage or to withhold payment. Bullock v. Trafalgar Insurance Co. of Canada,  O.J. No. 2566(Quicklaw) (Gen. Div.); Labelle v. Guardian Insurance Co. of Canada et al. (1989), 38 C.C.L.I. 274 (Ont. H.C.J.); Jauvin v. L’Ami Michel Automobile Canada Ltée et al (1986), 57 O.R. (2d) 528 (H.C.J.).
29 The duty of good faith also requires an insurer to deal with its insured’s claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not 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. A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy.
30 This duty of fairness, 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: Palmer v. Royal Insurance Co. of Canada (1995), 27 C.C.L.I. (2d) 249 (O.C.G.D.).
31 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.36
The court also specifically stated that it is improper for an insurance company to consider, as part of its assessment of a claim, whether the claim would be especially large. The only consideration an insurer should be taking into account when assessing a claim is its validity; its potential amount should have absolutely no bearing on the insurer’s decision-making:
64 There are troubling indications that the company may have been improperly concerned that Mr. Clarfield’s claim, if allowed, was likely to be a large one.37
In the result, the court was satisfied that the insurance company had worked to avoid payment of Clarfield’s claim, to the exclusion of actually evaluating his claim on its merits:
73 I find that Crown Life totally failed to assess Mr. Clarfield’s claim in a balanced and reasonable manner and failed to act fairly in dealing with it.
74 In my view, an insurer dealing promptly with Mr. Clarfield’s application for benefits would have been in a position at the end of the 90-day elimination period on November 25, 1997 to find that Mr. Clarfield was entitled to total disability benefits. Certainly the insurer, upon receipt of the initial medical reports, would know he had become totally disabled as of August 27, that he continued to be disabled on October 21, and that the elimination period would expire on November 25. Yet Crown Life did not even request updated medical reports from Dr. Robinson and Dr. Birnbaum until December 8, 1997, two weeks after Mr. Clarfield’s entitlement to total disability benefits had begun. At this point in time, the insurer had clear medical information that its insured suffered a major illness, it had had him interviewed by a psychiatric nurse of its choosing, it had received a detailed report about him from a private investigator, and it had received all his financial information. It is worth noting the claims adjudicator’s notes of telephone calls with the insurance broker, dated November 25, 1997 and December 5, 1997, indicated that she had all the information requested. Since Ms. Folk said, in her memo dated December 8, 1997, “I do not see how we could decline benefits…” and Ms. Walker’s response on December 12, 1997 makes it clear she was satisfied that Mr. Clarfield was then unable to return to work, it seems to me that the company did not require more time to approve the claim but to discover a basis for avoiding it.38
Crown Life’s egregious behaviour walked it straight into another issue, in that Crown Life’s violation of its duty to Clarfield resulted in a related, standalone claim against Crown Life for bad faith. The court having already concluded that Crown Life had engaged in underhanded tactics that violated its duty to Clarfield, it is perhaps unsurprising that aggravated damages of $75,000 and punitive damages of $200,000 were awarded Clarfield.
In assessing the appropriate amount of punitive damages to be awarded, the court noted that insurance companies, specifically, ought to have higher punitive damages imposed in such cases because their behaviour “was directed toward a disabled person over whom it enjoyed a measurable economic leverage and this increases the degree of its reprehensibility”39. The court’s comments on the liability of insurance companies in such cases are worthy of note:
115 My impression from the testimony of Crown Life’s witnesses was that these matters were not rare. However, in these circumstances, I propose to assess the quantum of punitive damages based solely on the fact that the insurer’s deleterious conduct in this case was as a result of its staff’s established practices, and that a disincentive to the continuation of those practices is necessary. In addition to all the factors discussed above I have considered that precedents in Canadian jurisprudence are sparse. I have concluded that an award of $200,000 in punitive damages is appropriate. This quantum is larger than in Whiten and is in rough proportion to the compensatory damages awarded. If anything it is out of balance with the defendant’s size and dividends of its deleterious conduct. Viewed in strictly economic terms, an award of this size is grossly insufficient to deter the defendant and other large insurers from similar conduct. It is conceivable that the insurer could save that amount by refusing just one legitimate claim of a high-income earner. I see some advantage to an incremental evolution of punitive damage awards, and I believe the ignominy of having its conduct denounced by the court will have some deterrent effect on the defendant and some impact on its business interests.40
Punitive damages of $200,000 were similarly awarded in Fernandes v Penncorp Life Insurance Co.41, and once again the court based its decision on the insurer’s failure to fulfill it’s obligation of dealing with the insured fairly. In particular in this case, the court was unimpressed with Penncorp’s reliance on surveillance, which depicted the insured lifting a wheelbarrow and shovelling some dirt on one single occasion. The court held that such evidence did not prove that the insured was capable of working hard manual labour for six or seven days per week, as the insured had done prior to his injuries, and further found that Penncorp’s use of this evidence as the foundation for denying the claim was an unsubtle attempt to take advantage of the insured’s economic vulnerability. This particularly disgusting act on the part of the insurer is certainly deserving of censure:
64 Avelino was observed in the surveillance on August 3, 2005 to lift a wheelbarrow and a wooden skid in and out of a truck on a single occasion. He was also observed to shovel some dirt. This does not remotely establish that he was able to do the heavy continuous labour for long hours for 6 to 7 days per week that he was doing in his bricklaying occupation, before he was injured. Penncorp received a report from Dr. Huth dated August 10, 2005, in which he expressed the opinion that Avelino would not be able to work at bricklaying again. It never received a medical opinion to the contrary except for Dr. McGonigal’s qualified opinion, in his report dated July 6, 2010, after viewing the surveillance video that “it is impossible to say whether Mr. Fernandes could return to work on a full time basis as a bricklayer.” There is no evidence that Ms. Mayo ever considered the detailed description of the heavy nature of bricklaying work that Avelino submitted with the questionnaire dated December 6, 2005. After Avelino submitted this document at the request of Penncorp she tried to settle the claim with Avelino on the basis that he was partially disabled. In my opinion there was never any doubt on the information that Pencorp had that Avelino was totally disabled from performing “any of the important daily duties pertaining to his occupation” of brick layer. What this means, as Chief Justice Laskin said in Paul Revere, is “unable to perform substantially all of the duties of that position.”
65 I am of the opinion that Penncorp’s handling of Avelino’s claim demonstrates bad faith. Penncorp breached the duty of an insurer in handling a claim under an insurance contract set out by Justice O’Connor in 702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd’s London, England [2000 CarswellOnt 904 (Ont. C.A.)] adopted by the Supreme Court of Canada in Fidler. What Ms. Mayo, on behalf of 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.” Ms. Mayo took an adversarial approach to Avelino’s claim for benefits for inability to do his own occupation. It is most distressing that she ignored the detailed job description of his occupation of bricklaying that Avelino provided in the questionnaire dated December 6, 2005 requested by Penncorp. She did not deal with his claim “fairly” and in a “balanced” way. This conduct constitutes “an independent actionable wrong”. It meets the test for punitive damages as being “highhanded, malicious, arbitrary or highly reprehensible misconduct.”42
In addition to the punitive damages, a further $100,000 in aggravated damages was awarded, as well as the actual contractual damages proven by the insured.
Yet another example of a $200,000 punitive damage award against an insurance company is found in Khazzaka v Commercial Union Assurance Co. of Canada43. This case, in addition to providing an example of punitive damages awarded against an insurer because of its egregious behaviour, also demonstrates the importance of an insurer conducting a “clean” investigation. At the outset of this paper mention was made of the proper way to conduct an investigation, i.e.: to set out to gather all relevant facts, evidence and witness accounts, then assimilate the information into a meaningful conclusion. The insurer in this case attempted to do what insurers often do – conclude that the insured’s claim is fraudulent (even in the absence of any evidence whatsoever that such is the case), and then attempting to support that conclusion by any means necessary. As this case illustrates, insurance companies that behave in such a manner should expect to be sanctioned by the courts, sooner or later:
14 In my view the evidence that the jury may have accepted and the reasonable inferences therefrom clearly establish a rational purpose for an award of punitive damages. As the trial judge pointed out, the critical facts in Whiten were more extreme and overt and largely occurred prior to trial. Here, the roots extend back to the early investigation, surface at trial and are supplemented by the nature of the testimony. The appellant had a duty to treat the insured fairly. It was not unfair to consult the fire department and police and refuse to accept their opinions without independent investigation. It began to be unfair conduct when the insurer persisted in denying the claim when no credible basis for alleging arson arose from that investigation. It was clearly unfair to concoct evidence of the presence of gasoline to support a defence, which may have been the jury’s finding. Unfairness multiplies as all obstacles to the viability of the defence of arson are turned aside without concern for the insured’s rights and well-being. The unfairness is further exaggerated when the defence is pursued through a trial even while the evidence of its supporters, in the trial judge’s word, “crumbled” beneath them. Unfairness compounded over and over again amounts to conduct that merits the condemnation of the court when visited by an insurer that owes a duty of good faith to its insured.
15 The appellant cannot excuse itself by hiring reputable independent agents. They owe no duty to the insured. But the insurer does, and its obligation continues through trial. I see it as no unreasonable burden on an insurer who alleges that the insured has committed a crime to closely oversee the conduct of that defence and assure itself at regular intervals that the insured who paid premiums for coverage is always being treated fairly. I have chosen to use the word “fair” throughout as a word that any business person can understand and apply. Other similar expressions appear in the authorities, but they all seem to be directed at instructing insurers that they should be fair-minded, both to their shareholders in resisting payment when it is fair to do so and to their insureds in paying claims when it is fair to do so.
20 The appellant persisted over a three-year period in resisting what it should have known was a valid claim. The appellant knew the insured to be a small businessman dependent upon his partially destroyed building for his income. It knew him to be in debt. It must have known that in a small community the word of arson would spread and mark the insured indelibly, at least with suspicion. It does not have to come with handcuffs to severely damage a reputation. Yet, the appellant persisted for three years, learning nothing from the example of Whiten. These are some of the considerations that Binnie J. referred to in Whiten and they are sufficient to satisfy me that this award is proportionate and fits in the rational limits within which a jury should be permitted to operate. In addition, there is no risk of double recovery in this case because the jury was told that the insurer would be paying the respondent’s costs of the litigation.44
That there is a need to punish insurance companies in order to deter them from continuing to behave in similar fashion was a sentiment echoed by the Nova Scotia Court of appeal in Kings Mutual Insurance Co. v Ackermann45, a case in which a deeply flawed insurance investigation led to the improper denial by the insurer of the insured’s claim. In allowing the punitive damage award made at trial to stand, the Court of Appeal specifically discussed the need to punish insurance companies in such a way that they will learn – even if learning the hard way – that they cannot continue to engage in behaviour that is abusive to their insureds:
46 The jury’s answers to the questions put to it clearly indicate its findings of bad faith in relation to Kings’ denial of coverage under the policy and that King’s conduct offended its sense of decency. This indicates the jury was satisfied Kings’ conduct of its investigation was outrageous. My review of the record satisfies me that this was a conclusion a reasonable jury could reach and that an award of punitive damages was a rational response on the jury’s part to its findings. It was not an inevitable or unavoidable response, but it was a rational response to what the jury saw and heard. Without an award of punitive damages, Kings would not have been required to pay more than its policy required it to pay and there would be nothing to deter it from acting similarly in the future; by not following up on all of the evidence relevant to a claim, withholding critical information from the adjuster engaged to investigate a claim and allowing the adjuster to present the results of his or her investigation in a partisan, biased and unobjective manner. The actions of Kings were exceptional, justifying an exceptional remedy.46
The most significant case to be recognized in discussing awards of punitive damages as related to the actions of insurance companies is the seminal Supreme Court of Canada decision in Whiten v Pilot Insurance Co.47. That case involved a property insurance policy which was tapped when the Whitens discovered a fire in their home in the middle of a cold, wintry January night in 1994. All three family members were able to escape, wearing only their pajamas in the middle of the night. Mr. Whiten gave his daughter his slippers to wear, as a result of which he suffered severe frostbite to his feet which necessitated a period of hospitalization and wheelchair use for some amount of time. The Whitens lost their home and its entire contents, including items of both a valuable and sentimental nature, along with their three pets. Although the cause of the fire was never ascertained, none of the parties who investigated the claim (the firefighters and fire chief who initially attended at the scene, and an investigator hired by Pilot to investigate the claim) suspected arson; rather, all parties concluded that the fire was accidental. Despite this conclusion and all evidence to the contrary, Pilot inexplicably took the position that in fact arson was the cause of the fire, and further, that the Whitens were responsible.
Pilot appeared to have rooted its decision in the financial difficulty the Whitens had been experiencing at the time of the fire, though there was absolutely no evidence whatsoever to substantiate Pilot’s suspicions. Then, despite being aware of the financial difficulty in which the Whitens found themselves in, particularly because they had just lost their home and every earthly thing they possessed, Pilot took advantage of their financial distress by endeavouring to do everything in its power to deny the claim. Pilot hired investigator after investigator, all of whom reported their findings of accidental fire, until it found one who would say it could have been arson. It repeatedly hired consultants of all description, and promptly fired each one when he or she inevitably concluded that the fire was not arson, but rather had occurred accidentally. It also failed to disclose any of that evidence to Whitens side during litigation.
Essentially what happened in this case is that Whiten engaged in a campaign to deny this claim from the very beginning, and conducted a reverse-investigation designed specifically to substantiate its baseless accusations, as articulated by the court:
102 The respondent claims that an insurer is entirely within its rights to thoroughly investigate a claim and exercise caution in evaluating the circumstances. It is not required to accept the initial views of its investigators. It is perfectly entitled to pursue further inquiries. I agree with these points. The problem here is that Pilot embarked on a “train of thought” as early as February 25, 1994 (see para. 7 above) that led to the arson trial, with nothing to go on except the fact that its policy holder had money problems.
103 The “train of thought” mentioned in the letter to Pilot from Derek Francis kept going long after the requirements of due diligence or prudent practice had been exhausted. There is a difference between due diligence and wilful tunnel vision. The jury obviously considered this case to be an outrageous example of the latter. In my view, an award of punitive damages (leaving aside the issue of quantum for the moment) was a rational response on the jury’s part to the evidence. It was not an inevitable or unavoidable response, but it was a rational response to what the jury had seen and heard. The jury was obviously incensed at the idea that the respondent would get away with paying no more than it ought to have paid after its initial investigation in 1994 (plus costs). It obviously felt that something more was required to demonstrate to Pilot that its bad faith dealing with this loss claim was not a wise or profitable course of action. The award answered a perceived need for retribution, denunciation and deterrence.
104 The intervener, the Insurance Council of Canada, argues that the award of punitive damages will over-deter insurers from reviewing claims with due diligence, thus lead to the payment of unmeritorious claims, and in the end drive up insurance premiums. This would only be true if the respondent’s treatment of the appellant is not an isolated case but is widespread in the industry. If, as I prefer to believe, insurers generally take seriously their duty to act in good faith, it will only be rogue insurers or rogue files that will incur such a financial penalty, and the extra economic cost inflicted by punitive damages will either cause the delinquents to mend their ways or, ultimately, move them on to lines of work that do not call for a good faith standard of behaviour.48
The insurance company’s behaviour was reprehensible and disgusting, particularly in light of its duty to be fair, honest and deal with the Whitens in good faith. Not only did it actively violate this duty, but it also attempted to force the Whitens into a position where they would have no bargaining power, and thus would be unlikely, unable or unwilling to pursue the claim against Pilot.
The jury was clearly outraged by Pilot’s actions, and awarded $1 million dollars in punitive damages, which of course Whiten appealed. While the Court of Appeal allowed the appeal and reduced the amount of damages awarded to $100,000, the Whitens appeal to the Supreme Court of Canada was allowed and the original award of $1 million restored. In so deciding, the Supreme Court of Canada did not mince words in describing Pilot’s conduct:
1 This case raises once again the spectre of uncontrolled and uncontrollable awards of punitive damages in civil actions. The jury was clearly outraged by the high-handed tactics employed by the respondent, Pilot Insurance Company, following its unjustified refusal to pay the appellant’s claim under a fire insurance policy (ultimately quantified at approximately $345,000). Pilot forced an eight-week trial on an allegation of arson that the jury obviously considered trumped up. It forced her to put at risk her only remaining asset (the insurance claim) plus approximately $320,000 in legal costs that she did not have. The denial of the claim was designed to force her to make an unfair settlement for less than she was entitled to. The conduct was planned and deliberate and continued for over two years, while the financial situation of the appellant grew increasingly desperate. Evidently concluding that the arson defence from the outset was unsustainable and made in bad faith, the jury added an award of punitive damages of $1 million, in effect providing the appellant with a “windfall” that added something less than treble damages to her actual out-of-pocket loss. The respondent argues that the award of punitive damages is itself outrageous.
3 The appellant was able to rent a small winterized cottage nearby for $650 per month. Pilot made a single $5000 payment for living expenses and covered the rent for a couple of months or so, then cut off the rent without telling the family, and thereafter pursued a hostile and confrontational policy which the jury must have concluded was calculated to force the appellant (whose family was in very poor financial shape) to settle her claim at substantially less than its fair value. The allegation that the family had torched its own home was contradicted by the local fire chief, the respondent’s own expert investigator, and its initial expert, all of whom said there was no evidence whatsoever of arson. The respondent’s position, based on wishful thinking, was wholly discredited at trial. Pilot’s appellate counsel conceded here and in the Ontario Court of Appeal that there was no air of reality to the allegation of arson.49
Indeed, the Supreme Court made special mention of the fact that, while Pilot claimed it should not be as severely punished because this was a single instance of mishandling a claim, it provided no evidence to support this argument and in fact, all evidence provided led to the conclusion that Pilot was deliberately mistreating the Whitens in an attempt to further weaken their bargaining position and force them into a settlement which would be advantageous to Pilot:
130 The respondent points out that there is no evidence this case represents a deliberate corporate strategy as opposed to an isolated, mishandled file that ran amok. This is true, but it is also true that Pilot declined to call evidence to explain why this file ran amok, and what steps, if any, have been taken to prevent a recurrence.
131 The respondent also argues that at the end of the day, it did not profit financially from its misbehaviour. This may also be true, but if so, that result was not for want of trying. The respondent clearly hoped to starve the appellant into a cheap settlement. Crabbe’s letter of June 9, 1994, quoted earlier, suggests as much. That it failed to do so is due in no small part to appellant’s counsel who took a hotly contested claim into an eight-week jury trial on behalf of a client who was effectively without resources of her own; and who obviously could have been starved into submission but for his firm’s intervention on her behalf.50
Such reprehensible conduct is certainly deserving of severe sanction, and there are those who might suggest that one million dollars is insufficient to truly punish Pilot for its absolutely despicable behaviour in this case.
There is no doubt that there are unscrupulous individuals who will stop at nothing to advance fraudulent claims. The insurance industry is entitled, and even obligated, to investigate questionable claims. Surveillance should be a tool used by an open-minded and fair insurance company to determine whether a claim is justified. It is an abuse of process, however, to use investigation as a weapon against a legitimate claimant against whom an insurer has no prior evidence of wrongdoing. It is an especially improper to use surveillance as a lever to force vulnerable claimants to under-settle their cases. Surveillance is a powerful tool. It should be used to legitimize valid claims, and not just to bolster claims for denial. Clearly there is fraud and abuse in the system, but there is improper conduct on BOTH sides. The result is rampant litigation and rising premiums. The public holds lawyers, insurance companies and investigators with equal distain. The public would benefit from a greater recognition that there is blame on both sides. Perhaps if the bad players, on both sides, are more aggressively held to account, there will be less need for both trial lawyers and investigators. Until that happens, I anticipate that we will continue to cross paths with each other in the Court Room.
1 Andrew McGrath, “Auto insurance fraud costs Canadian consumers billions of dollars each year”, online: The Insurance Bureau of Canada <http://www.ibc.ca/ns/resources/media-centre/media-releases/auto-insurance-fraud-costs-canadian-consumers-billions-of-dollars-each-year> March 9, 2017, accessed March 9, 2019.
2 Specifically motor vehicle no-fault insurance contracts and long-term disability contracts.
3 Adams v Confederation Life Insurance Co. (1994), 1994 CarswellAlta 78 (ABQB), at para 57.
4 Fancy v Mutual of Omaha Insurance Co., 1991 CarswellSask 125 (SKQB).
5 Ibid, at paras 31, 33 – 35.
6 Harris v Home Trust Co. (2009), 2009 CarswellOnt 6249 (OSCJ).
7 Ibid, at para 17.
8 Ibid, at para 18.
9 Ibid, at paras 20, 24.
10 Kursar v BCAA Insurance Corp., 2007 BCSC 983, 2007 CarswellBC 1564.
11 Rushton v Economical Mutual Insurance Co., 2000 PESCTD 39, 2000 CarswellPEI 146.
12 Ibid, at para 82.
13 Ibid, at paras 79 and 81.
14 Johal v National Life Assurance Co. of Canada, 1991 CarswellOnt 1517 (OCJ (GD)).
15 Ibid, at para 3.
16 Ibid, at para 26.
17 Ibid, at para 38.
18 Fidler v Sun Life Assurance Co. of Canada, 2006 SCC 30, 2006 CarswellBC 1596.
19 Ibid, at para 8.
20 Ibid, at para 10.
22 Ibid, at paras 57 – 59.
23 Ibid, at paras 73 – 75.
24 Iannarella v Corbett, 2015 ONCA 110.
25 Ibid, at paras 44, 45 and 92.
26 Ibid, at para 114.
27 Adams v Confederation Life Insurance Co. (1994), 1994 CarswellAlta 78 (ABQB).
28 Ibid, at paras 46 – 49.
29 Ibid, at para 72.
30 Brandiferri v Wawanesa Mutual Insurance Co., 2012 ONSC 2206, 2012 CarswellOnt 8152.
31 Ibid, at para 186.
32 Ibid, at para 199,
33 Ibid, at paras 212 – 214.
34 Zurich Life Insurance Co. v Branco, 2015 SKCA 71, 2015 CarswellSask 342.
35 Clarfield v Crown Life Insurance Co. (2000), 2000 CarswellOnt 3822 (OSCJ).
36 Ibid, at paras 27 – 31.
37 Ibid, at para 64.
38 Ibid, at paras 73 and 74.
39 Ibid, at para 103.
40 Ibid, at para 115.
41 Fernandes v Penncorp Life Insurance Co., 2013 ONSC 1637, 2013 CarswellOnt 3163.
42 Ibid, at paras 64, 65.
43 Khazzaka v Commercial Union Assurance Co. of Canada (2002), 2002 CarswellOnt 2605 (ONCA).
44 Ibid, at paras 14, 15 and 20.
45 Kings Mutual Insurance Co. v Ackermann, 2010 NSCA 39, 2010 CarswellNS 285.
46 Ibid, at para 47.
47 Whiten v Pilot Insurance Co., 2002 SCC 18, 2002 CarswellOnt 537.
48 Ibid, at paras 102 – 104.
49 Ibid, at paras 1, 3.
50 Ibid, at paras 130 and 131.
Table of Authorities
Adams v Confederation Life Insurance Co. (1994), 1994 CarswellAlta 78 (ABQB).Brandiferri v Wawanesa Mutual Insurance Co., 2012 ONSC 2206, 2012 CarswellOnt 8152.
Clarfield v Crown Life Insurance Co. (2000), 2000 CarswellOnt 3822 (OSCJ).
Fancy v Mutual of Omaha Insurance Co., 1991 CarswellSask 125 (SKQB).
Fernandes v Penncorp Life Insurance Co., 2013 ONSC 1637, 2013 CarswellOnt 3163.
Fidler v Sun Life Assurance Co. of Canada, 2006 SCC 30, 2006 CarswellBC 1596.
Harris v Home Trust Co. (2009), 2009 CarswellOnt 6249 (OSCJ).
Iannarella v Corbett, 2015 ONCA 110.
Johal v National Life Assurance Co. of Canada (1991), 1991 CarswellOnt 1517 (OCJ (GD)).
Khazzaka v Commercial Union Assurance Co. of Canada (2002), 2002 CarswellOnt 2605 (ONCA).
Kings Mutual Insurance Co. v Ackermann, 2010 NSCA 39, 2010 CarswellNS 285.
Kursar v BCAA Insurance Corp., 2007 BCSC 983, 2007 CarswellBC 1564.
Rushton v Economical Mutual Insurance Co., 2000 PESCTD 39, 2000 CarswellPEI 146.
Whiten v Pilot Insurance Co., 2002 SCC 18, 2002 CarswellOnt 537.
Zurich Life Insurance Co. v Branco, 2015 SKCA 71, 2015 CarswellSask 342.
Andrew McGrath, “Auto insurance fraud costs Canadian consumers billions of dollars each year”, online: The Insurance Bureau of Canada <http://www.ibc.ca/ns/resources/media-centre/media-releases/auto-insurance-fraud-costs-canadian-consumers-billions-of-dollars-each-year> March 9, 2017, accessed March 9, 2019.