Claiming Punitive Damages Against Insurer Involves Allegations of Misconduct Usually Related to Breached Good Faith Duties

[205]  In Vorvis v. Insurance Corporation of British Columbia, 1989 CanLII 93 (SCC), [1989] 1 S.C.R. 1085, McIntyre J. for the majority, held that at para. 25, that punitive damages may be recoverable provided that the defendant’s conduct gives rise to the claim itself as an actionable wrong.

[206]  The requirement of an independent tort in order to advance a claim for punitive damages was modified by Binnie J in Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at para. 79, when he concluded that an actionable wrong as discussed in Vorvis did not require an independent tort. A breach of the contractual duty of good faith would qualify as an independent wrong so as to form a foundation for a claim of punitive damages. This was also reaffirmed in the Supreme Court’s decision in Honda Canada Inc. v. Keays, 2008 SCC 39, [2008] 2 S.C.R. 362, at para. 62.

[207]  As to the nature and character of the bad faith conduct that may ground a claim for punitive damages, in Whiten, at para. 70, Binnie J. proposed a more nuanced analysis of the conduct required, where he stated:

Fourth, the incantation of the time-honoured pejoratives (“high-handed”, “oppressive”, “vindictive”, etc.) provides insufficient guidance (or discipline) to the judge or jury setting the amount.  Lord Diplock in Cassell, supra, at p. 1129, called these the “whole gamut of dyslogistic judicial epithets”.  A more principled and less exhortatory approach is desirable.

[208]  In its decision in Fidler v. Sun Life Assurance Company of Canada, 2006 SCC 30, [2006] 2 S.C.R. 3 at para. 62, the court discussed the principles that govern the award of punitive damages stating that in cases of breach of contract, the breach must constitute a marked departure from ordinary standards of decency. Although subsequently modified, in part, by the court in Honda Canada Inc., the court stated as follows at para. 62:

In Vorvis, McIntyre J., for the majority, held that punitive damages are recoverable provided the defendant’s conduct said to give rise to the claim is itself  “an actionable wrong”. This position stood until 2002 when my colleague Binnie J., writing for the majority, dealt comprehensively with the issue of punitive damages in the context of the Whiten case. He specified that an “actionable wrong” within the Vorvis rule does not require an independent tort and that a breach of the contractual duty of good faith can qualify as an independent wrong. Binnie J. concluded, at para. 82, that “[a]n independent actionable wrong is required, but it can be found in breach of a distinct and separate contractual provision or other duty such as a fiduciary obligation.” In the case at hand, the trial judge and the Court of Appeal concluded that Honda’s “discriminatory conduct” amounted to an independent actionable wrong for the purposes of allocating punitive damages. This being said, there is no need to discuss the concept of “actionable wrong” here; this was done in Whiten. What matters here is that there was no basis for the judge’s decision on the facts.  I will therefore examine the facts and determine why punitive damages were not well justified according to the criteria in Whiten. I will also discuss the need to avoid duplication in damage awards. Damages for conduct in the manner of dismissal are compensatory; punitive damages are restricted to advertent wrongful acts that are so malicious and outrageous that they are deserving of punishment on their own. This distinction must guide judges in their analysis.

[209]  The duty of good faith resting on the insurer and its corresponding duty of fairness to the insured does not necessarily require the insurer to be correct in law in its denial of a claim. The mere denial of a claim that ultimately succeeds is not in and of itself an act of bad faith: Ursanovic, at para. 29.

[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), 1999 CanLII 3051 (ON CA), 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, [1996] O.J. No. 2566 (Q.L.) (Gen. Div.); Labelle v. Guardian Insurance Co. of Can. et al. (1989), 38 C.C.L.I. 274 (Ont. H.C.J.); Jauvin v. L’Ami Michel Automobile Canada Ltee et al (1986), 1986 CanLII 2572 (ON SC), 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.  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.).

[30] 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.