Whiten v. Pilot Insurance Co.

Whiten v. Pilot Insurance Co.
Collection
Supreme Court Judgments
Date
2002-02-22
Neutral citation
2002 SCC 18
Report
[2002] 1 SCR 595
Case number
27229
Judges
McLachlin, Beverley; L'Heureux-Dubé, Claire; Gonthier, Charles Doherty; Major, John C.; Binnie, William Ian Corneil; Arbour, Louise; LeBel, Louis
On appeal from
Ontario
Subjects
Insurance
Torts
Notes
SCC Case Information: 27229
Decision Content
Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, 2002 SCC 18
Daphne Whiten Appellant/Respondent on cross-appeal
v.
Pilot Insurance Company Respondent/Appellant on cross-appeal
and
The Insurance Council of Canada and
the Ontario Trial Lawyers Association Interveners
Indexed as: Whiten v. Pilot Insurance Co.
Neutral citation: 2002 SCC 18.
File No.: 27229.
2000: December 14; 2002: February 22.
Present: McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Major, Binnie, Arbour and LeBel JJ.
on appeal from the court of appeal for ontario
Insurance – Insurer’s duty of good faith and fair dealing – Insurer contesting fire insurance claim in bad faith – Whether policy holder entitled to award of punitive damages __ Whether jury charge adequate – Whether jury award of $1 million in punitive damages should be restored.
Damages – Punitive damages – Insurer’s duty of good faith and fair dealing – Insurer contesting fire insurance claim in bad faith __ Whether policy holder entitled to award of punitive damages __ Whether jury award of $1 million in punitive damages should be restored.
The appellant and her husband discovered a fire in the addition to their house just after midnight in January 1994. They and their daughter fled the house wearing only their night clothes. It was minus 18 degrees Celsius. The husband gave his slippers to his daughter to go for help and suffered serious frostbite to his feet. The fire totally destroyed the home and its contents, including three cats. The appellant was able to rent a small winterized cottage nearby for $650 per month. The respondent insurer made a single $5,000 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 confrontational policy. The appellant’s family was in very poor financial shape. Ultimately this confrontation led to a protracted trial based on the respondent’s allegation that the family had torched its own home, even though the local fire chief, the respondent’s own expert investigator, and its initial expert all said there was no evidence whatsoever of arson. The respondent’s position was wholly discredited at trial and its appellate counsel conceded that there was no air of reality to the allegation of arson. The jury awarded compensatory damages and $1 million in punitive damages. A majority of the Court of Appeal allowed the appeal in part and reduced the punitive damages award to $100,000.
Held (LeBel J. dissenting on the appeal): The appeal should be allowed and the jury award of $1 million in punitive damages restored. The respondent’s cross-appeal against the award of any punitive damages should be dismissed.
Per McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Major, Binnie and Arbour JJ.: The jury’s award of punitive damages, though high, was within rational limits. The respondent insurer’s conduct towards the appellant was exceptionally reprehensible. It forced her to put at risk her only remaining asset (the $345,000 insurance claim) plus $320,000 in 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. The jury evidently believed that the respondent knew from the outset that its arson defence was contrived and unsustainable. Insurance contracts are sold by the insurance industry and purchased by members of the public for peace of mind. The more devastating the loss, the more the insured may be at the financial mercy of the insurer, and the more difficult it may be to challenge a wrongful refusal to pay the claim.
The jury decided a powerful message of denunciation, retribution and deterrence had to be sent to the respondent and they sent it. The obligation of good faith dealing means that the appellant’s peace of mind should have been the respondent’s objective, and her vulnerability ought not to have been aggravated as a negotiating tactic. It is this relationship of reliance and vulnerability that was outrageously exploited by the respondent in this case.
An award of punitive damages in a contract case, though rare, is obtainable. It requires an “actionable wrong” in addition to the breach sued upon. Here, in addition to the contractual obligation to pay the claim, the respondent was under a distinct and separate obligation to deal with its policyholders in good faith. A breach of the contractual duty of good faith was thus independent of and in addition to the breach of contractual duty to pay the loss. The plaintiff specifically asked for punitive damages in her statement of claim and if the respondent was in any doubt about the facts giving rise to the claim, it ought to have applied for particulars.
The trial judge’s charge to the jury with respect to punitive damages should include words to convey an understanding of the following points: (1) Punitive damages are very much the exception rather than the rule, (2) imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour. (3) Where they are awarded, punitive damages should be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant, (4) having regard to any other fines or penalties suffered by the defendant for the misconduct in question. (5) Punitive damages are generally given only where the misconduct would otherwise be unpunished or where other penalties are or are likely to be inadequate to achieve the objectives of retribution, deterrence and denunciation. (6) Their purpose is not to compensate the plaintiff, but (7) to give a defendant his or her just desert (retribution), to deter the defendant and others from similar misconduct in the future (deterrence), and to mark the community’s collective condemnation (denunciation) of what has happened. (8) Punitive damages are awarded only where compensatory damages, which to some extent are punitive, are insufficient to accomplish these objectives, and (9) they are given in an amount that is no greater than necessary to rationally accomplish their purpose. (10) The jury should be told that while normally the state would be the recipient of any fine or penalty for misconduct, the plaintiff will keep punitive damages as a “windfall” in addition to compensatory damages. (11) Judges and juries in our system have usually found that moderate awards of punitive damages, which inevitably carry a stigma in the broader community, are generally sufficient. While the jury charge in this case was skeletal, it was upheld by the Court of Appeal (unanimous on this point) and, with hesitation, this Court should not allow the appeal on that ground.
As to quantum, the award of $1 million in punitive damages was more than this Court would have awarded, but was still within the high end of the range where juries are free to make their assessment.
Per LeBel J. (dissenting on the appeal): While the respondent’s bad faith in its handling of the claim, up to and during the trial, amply justifies awarding punitive damages, an award of $1 million – three times the compensation for loss of property – goes well beyond a rational and appropriate use of this kind of remedy. This case started as litigation based on a home insurance contract. The appellant suffered a loss and encountered obduracy and bad faith on the part of the respondent. There was no evidence that such conduct was a regular incident of the respondent’s way of running its business. Nor is such behaviour widespread in the Canadian insurance industry. The need for general deterrence here is far from clear. Concerns about industry practices should mainly be addressed through the appropriate regulatory and penal regimes, rather than through haphazard punitive damages awards.
The award fails the rationality test because its sole purpose is to punish bad faith and unfair dealing by the respondent. The award also fails the proportionality test because the punishment far exceeds whatever property or economic losses may have been caused by the non-performance of the contract. The Court of Appeal properly set the amount of punitive damages at a sum that is consistent with the nature and purpose of punitive damages in the law of torts. The amount appears reasonable and proportionate. It imposed significant punishment for the bad faith of the respondent without upsetting the proper balance between the compensatory and punitive functions of tort law. Predictability and consistency should be factored into situations where the nature of the damages suffered makes it difficult for a jury to determine a proper quantum. Setting punitive damages at amounts that do not significantly exceed the real economic loss would leave them in their proper place within the scheme of the law of torts. Where trials are held with a judge and jury, instructions on the range of awards would be useful. The jury should be instructed clearly that an award of general damages may also amount to all the punishment that is necessary in a given case.
Cases Cited
By Binnie J.
Applied: Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130; referred to: Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085; Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701; Cassell & Co. v. Broome, [1972] A.C. 1027, aff’g [1971] 2 Q.B. 354; BMW of North America, Inc. v. Gore, 517 U.S. 559 (1996); BMW of North America, Inc. v. Gore, 701 So.2d 507 (1997); Wilkes v. Wood (1763), Lofft. 1, 98 E.R. 489; Huckle v. Money (1763), 2 Wils. K.B. 206, 95 E.R. 768; Collette v. Lasnier (1886), 13 S.C.R. 563; Rookes v. Barnard, [1964] A.C. 1129; Kuddus v. Chief Constable of Leicestershire Constabulary, [2001] 3 All E.R. 193; Uren v. John Fairfax & Sons Pty. Ltd. (1966), 117 C.L.R. 118; Taylor v. Beere, [1982] 1 N.Z.L.R. 81; Conway v. Irish National Teachers’ Organisation (1991), 11 I.L.R.M. 497; John v. MGN Ltd., [1997] Q.B. 586; Thompson v. Commissioner of Police of the Metropolis, [1997] 2 All E.R. 762; Lamb v. Cotogno (1987), 164 C.L.R. 1; XL Petroleum (N.S.W.) Pty. Ltd. v. Caltex Oil (Australia) Pty. Ltd. (1985), 155 C.L.R. 448; Australian Consolidated Press Ltd. v. Uren (1966), 117 C.L.R. 185; Whitfeld v. De Lauret & Co. (1920), 29 C.L.R. 71; Gray v. Motor Accident Commission (1998), 196 C.L.R. 1; M‘Comb v. Low (1873), 1 N.Z. Jur. 49; Donselaar v. Donselaar, [1982] 1 N.Z.L.R. 97; Daniels v. Thompson, [1998] 3 N.Z.L.R. 22; Cook v. Evatt (No. 2), [1992] 1 N.Z.L.R. 676; McLaren Transport Ltd. v. Somerville, [1996] 3 N.Z.L.R. 424; Aquaculture Corp. v. New Zealand Green Mussel Co., [1990] 3 N.Z.L.R. 299; Coloca v. B.P. Australia Ltd., [1992] 2 V.R. 441; L. v. Robinson, [2000] 3 N.Z.L.R. 499; Ellison v. L., [1998] 1 N.Z.L.R. 416; Auckland City Council v. Blundell, [1986] 1 N.Z.L.R. 732; Green v. Matheson, [1989] 3 N.Z.L.R. 564; McKenzie v. Attorney-General, [1992] 2 N.Z.L.R. 14; Dunlea v. Attorney-General, [2000] 3 N.Z.L.R. 136; W. v. W., [1999] 2 N.Z.L.R. 1; Cooper v. O’Connell, No. 85/90-96, 1997 Ireland S.C. Lexis; Day v. Woodworth, 54 U.S. (13 How.) 363 (1851); Fay v. Parker, 53 N.H. 342 (1872); Liebeck v. McDonald’s Restaurants, P.T.S., Inc., 1995 WL 360309; Pacific Mutual Life Insurance Co. v. Haslip, 499 U.S. 1 (1991); Honda Motor Co. v. Oberg, 512 U.S. 415 (1994); TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993); Cooper Industries, Inc. v. Leatherman Tool Group, Inc., 121 S.Ct. 1678 (2001); M. (K.) v. M. (H.), [1992] 3 S.C.R. 6; Denison v. Fawcett, [1958] O.R. 312; Robitaille v. Vancouver Hockey Club Ltd. (1981), 124 D.L.R. (3d) 228; Buxbaum (Litigation guardian of) v. Buxbaum, [1997] O.J. No. 5166 (QL); Glendale v. Drozdzik (1993), 77 B.C.L.R. (2d) 106; Pollard v. Gibson (1986), 1 Y.R. 167; Joanisse v. Y. (D.) (1995), 15 B.C.L.R. (3d) 224; Canada v. Lukasik (1985), 18 D.L.R. (4th) 245; Wittig v. Wittig (1986), 53 Sask. R. 138; Royal Bank of Canada v. W. Got & Associates Electric Ltd., [1999] 3 S.C.R. 408; Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147; Andrusiw v. Aetna Life Insurance Co. of Canada (2001), 289 A.R. 1; Edwards v. Harris-Intertype (Canada) Ltd. (1983), 40 O.R. (2d) 558, aff’d (1984), 9 D.L.R. (4th) 319; Grenn v. Brampton Poultry Co. (1959), 18 D.L.R. (2d) 9; Starkman v. Delhi Court Ltd. (1960), 24 D.L.R. (2d) 152, aff’d (1961), 28 D.L.R. (2d) 269; Gastebled v. Stuyck (1973), 12 C.P.R. (2d) 102, aff’d (1974), 15 C.P.R. (2d) 137; Paragon Properties Ltd. v. Magna Envestments Ltd. (1972), 24 D.L.R. (3d) 156; Rieger v. Burgess, [1988] 4 W.W.R. 577; Lauscher v. Berryere (1999), 172 D.L.R. (4th) 439; Walker v. CFTO Ltd. (1987), 59 O.R. (2d) 104; Patenaude v. Roy (1994), 123 D.L.R. (4th) 78; Recovery Production Equipment Ltd. v. McKinney Machine Co. (1998), 223 A.R. 24; Mustaji v. Tjin (1996), 30 C.C.L.T. (2d) 53; Québec (Curateur public) v. Syndicat national des employés de l'Hôpital St-Ferdinand (1994), 66 Q.A.C. 1; Matusiak v. British Columbia and Yukon Territory Building and Construction Trades Council, [1999] B.C.J. No. 2416 (QL); Gerula v. Flores (1995), 126 D.L.R. (4th) 506; Walker v. D’Arcy Moving & Storage Ltd. (1999), 117 O.A.C. 367; United Services Funds (Trustees) v. Hennessey, [1994] O.J. No. 1391 (QL); Williams v. Motorola Ltd. (1998), 38 C.C.E.L. (2d) 76; Procor Ltd. v. U.S.W.A. (1990), 71 O.R. (2d) 410; Claiborne Industries Ltd. v. National Bank of Canada (1989), 69 O.R. (2d) 65; Horseshoe Bay Retirement Society v. S.I.F. Development Corp. (1990), 66 D.L.R. (4th) 42; Kates v. Hall (1991), 53 B.C.L.R. (2d) 322; Muir v. Alberta, [1996] 4 W.W.R. 177; R. (L.) v. Nyp (1995), 25 C.C.L.T. (2d) 309; Weinstein v. Bucar, [1990] 6 W.W.R. 615; Norberg v. Wynrib, [1992] 2 S.C.R. 226; Nantel v. Parisien (1981), 18 C.C.L.T. 79; Lubrizol Corp. v. Imperial Oil Ltd. (1994), 84 F.T.R. 197, rev’d [1996] 3 F.C. 40; Westbank Band of Indians v. Tomat, [1989] B.C.J. No. 1638 (QL).
By LeBel J. (dissenting on the appeal)
Ratych v. Bloomer, [1990] 1 S.C.R. 940; Jacobi v. Griffiths, [1999] 2 S.C.R. 570; Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085; Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701; Edwards v. Law Society of Upper Canada, [2001] 3 S.C.R. 562, 2001 SCC 80; Cooper v. Hobart, [2001] 3 S.C.R. 537, 2001 SCC 79; Kamloops (City of) v. Nielsen, [1984] 2 S.C.R. 2; Palsgraf v. Long Island R. Co., 162 N.E. 99 (1928); Canadian National Railway Co. v. Norsk Pacific Steamship Co., [1992] 1 S.C.R. 1021; Hill v. Church of Scientology of Toronto, [1995] 2 S.C.R. 1130; Cassell & Co. v. Broome, [1972] A.C. 1027; Andrews v. Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229; Thornton v. Board of School Trustees of School District No. 57 (Prince George), [1978] 2 S.C.R. 267; Arnold v. Teno, [1978] 2 S.C.R. 287; ter Neuzen v. Korn, [1995] 3 S.C.R. 674; Caron v. Chodan Estate (1992), 58 O.A.C. 173; Gray v. Alanco Developments Ltd., [1967] 1 O.R. 597; Howes v. Crosby (1984), 45 O.R. (2d) 449.
Statutes and Regulations Cited
Courts of Justice Act, R.S.O. 1990, c. C.43, s. 118.
Rules of Civil Procedure, R.R.O. 1990, Reg. 194, Rule 25.06(9).
Authors Cited
Chapman, Bruce, and Michael Trebilcock. “Punitive Damages: Divergence in Search of a Rationale” (1989), 40 Ala. L. Rev. 741.
Feldthusen, Bruce. “Punitive Damages: Hard Choices and High Stakes”, [1998] N.Z. L. Rev. 741.
Feldthusen, Bruce. “Recent Developments in the Canadian Law of Punitive Damages” (1990), 16 Can. Bus. L.J. 241.
Halsbury’s Laws of Australia, vol. 9. Sydney: Butterworths, 1995.
Halsbury’s Laws of England, vol. 12(1), 4th ed. (reissue). By Lord Mackay of Clashfern. London: Butterworths, 1998.
Hibbert, Christopher. The Roots of Evil: A Social History of Crime and Punishment. Boston: Little, Brown, 1963.
Ireland. Law Reform Commission. Consultation Paper on Aggravated, Exemplary and Restitutionary Damages. Dublin: The Commission, 1998.
Linden, Allen M. Canadian Tort Law, 6th ed. Toronto: Butterworths, 1997.
McGregor on Damages, 16th ed. By Harvey McGregor. London: Sweet & Maxwell, 1997.
Ontario. Law Reform Commission. Report on Exemplary Damages. Toronto: The Commission, 1991.
Schlueter, Linda L., and Kenneth R. Redden. Punitive Damages, vol. 1, 4th ed. New York: Lexis, 2000.
United Kingdom. House of Commons, 6th series, Written Answers to Questions, November 9, 1999.
United Kingdom. Law Commission for England and Wales, Report 247. Aggravated, Exemplary and Restitutionary Damages, December 16, 1997.
Vogel, Paul G. Cohen Melnitzer’s Civil Procedure in Practice, vol. 1. Toronto: Carswell, 1989 (loose-leaf updated 1990, release No. 1).
Watson, Garry D., and Craig Perkins. Holmested and Watson: Ontario Civil Procedure, vol. 1. Toronto: Carswell, 1984 (loose-leaf updated 2001, release No. 5).
Weinrib, Ernest J. The Idea of Private Law. Cambridge, Mass.: Harvard University Press, 1995.
Windeyer, William John Victor. Lectures on Legal History, 2nd ed. rev. Sydney: Law Book, 1957.
APPEAL and CROSS-APPEAL from a judgment of the Ontario Court of Appeal (1999), 42 O.R. (3d) 641, 170 D.L.R. (4th) 280, 117 O.A.C. 201, 32 C.P.C. (4th) 3, [1999] I.L.R. ¶ I-3659, [1999] O.J. No. 237 (QL), allowing in part the respondent’s appeal from a judgment of the Ontario Court (General Division) (1996), 132 D.L.R. (4th) 568, 47 C.P.C. (3d) 229, [1996] O.J. No. 227 (QL). Appeal allowed, LeBel J. dissenting. Cross-appeal dismissed.
Gary R. Will and Anil Varma, for the appellant/respondent on cross-appeal.
Earl A. Cherniak, Q.C., and Kirk F. Stevens, for the respondent/appellant on cross-appeal.
Neil Finkelstein, Melanie L. Aitken and Russell Cohen, for the intervener the Insurance Council of Canada.
Robert B. Munroe, Andrew J. Spurgeon and Thomas P. Connolly, for the intervener the Ontario Trial Lawyers Association.
The judgment of McLachlin C.J. and L’Heureux‑Dubé, Gonthier, Major, Binnie and Arbour JJ. was delivered by
1 Binnie J. – 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.
2 The appellant, Daphne Whiten, bought her home in Haliburton County, Ontario, in 1985. Just after midnight on January 18, 1994, when she and her husband Keith were getting ready to go to bed, they discovered a fire in the addition to their house. They and their daughter, who had also been upstairs, fled the house wearing only their night clothes. It was minus 18 degrees Celsius. Mr. Whiten gave his slippers to his daughter to go for help and suffered serious frostbite to his feet for which he was hospitalized. He was thereafter confined to a wheelchair for a period of time. The fire totally destroyed the Whitens’ home and its contents, including their few valuable antiques and many items of sentimental value and their three cats.
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.
4 A majority of the Ontario Court of Appeal allowed the appeal in part and reduced the punitive damage award to $100,000. In my view, on the exceptional facts of this case, there was no basis on which to interfere with the jury award. The award, though very high, was rational in the specific circumstances disclosed in the evidence and within the limits that a jury is allowed to operate. The appellant was faced with harsh and unreasoning opposition from an insurer whose policy she had purchased for peace of mind and protection in just such an emergency. The jury obviously concluded that people who sell peace of mind should not try to exploit a family in crisis. Pilot, as stated, required the appellant to spend $320,000 in legal costs to collect the $345,000 that was owed to her. The combined total of $665,000 at risk puts the punitive damage awards in perspective. An award of $1 million in punitive damages is certainly at the upper end of a sustainable award on these facts but not beyond it. I would allow the appeal and restore the jury award of $1 million in punitive damages.
I. Facts
5 The facts surrounding the fire itself have already been briefly mentioned. The origin of the fire was never discovered but everyone who investigated the fire in the six months after it occurred concluded that it was accidental. The first persons to investigate the fire were the fire chief and firefighters called to the scene. The fire chief thought, and he was eventually shown to be correct, that the fire was caused at a single point of origin by a malfunctioning kerosene heater in the porch of the addition. This was where the fire was first observed and also the area which had sustained the most fire damage. The firefighters saw no evidence of arson and therefore they did not request the Fire Marshal’s office to investigate.
6 Pilot retained an experienced independent insurance adjuster, Derek Francis, to investigate the loss. Francis inspected the site and interviewed the Whitens, who freely acknowledged that they had both been unemployed and had financial difficulties. Francis also interviewed the firefighters about the speed at which the fire spread, a key indicator of arson. Both the physical evidence and the Whitens’ conduct satisfied Francis that the fire was accidental and on February 3, 1994 he reported to Pilot that “there is no suspicion of arson on behalf of the insureds or any members of their family”.
7 Francis made further investigations during which he determined that although the Whitens’ mortgage payments were in arrears, refinancing was being arranged. It appears that Pilot’s Senior Claims Examiner, Mr. Chris Porter, was already moving towards the conclusion that the claim should be disputed based on his suspicions of the family’s financial problems. In a letter dated February 25, 1994, Francis wrote to Pilot:
As outlined in my 2nd report with the physical evidence we have and the fact that the insured was attempting to arrange financing through another source and pay off the existing mortgage, there is little or no base [sic] to deny this claim. I certainly agree with your train of thought and if we did not have the physical evidence and the information from the insured’s solicitor that he was arranging financing for the Whitens, then my recommendations would certainly be opposite to what they are today. Unfortunately we must deal with the facts on hand and proceed with the adjustment accordingly in my opinion. [Emphasis added.]
8 Pilot did not agree that “there is little or no base [sic] to deny this claim”, although at that stage it had no evidence to support a defence of arson. It refused to accept Francis’s recommendations and decided to deny the claim. It did not tell Francis why it would not pay the claim and Francis in turn did not advise the Whitens of what was happening.
9 Pilot requested the Insurance Crime Prevention Bureau, a body set up by the insurance industry, to review the analysis of Pilot’s investigator. By letter dated February 25, 1994, the Bureau reported that “we wouldn’t have a leg to stand on as far as declining the claim”. Pilot, having asked for the opinion, then apparently decided that the Bureau’s evaluator was not in fact qualified to render an opinion. No one from Pilot testified as to why the claims examiner, and subsequently Pilot’s Branch Manager, Mr. Steven Carter, rejected this advice as well.
10 In March 1994, Pilot’s Head Office, with nothing to go on except some vague suspicions, instructed Francis to tell the landlord of the cottage that the appellant was renting that it was no longer going to pay the rent. Francis communicated this to the landlord but never told the appellant. We do not know why there was no communication. It was the depth of winter. The respondent’s Head Office made this decision with full knowledge that the Whitens were in desperate financial circumstances.
11 Pilot then instructed Francis to pursue other inquiries about the fire. Francis conducted these inquiries but still ruled out arson. On April 28, 1994, he confirmed his opinion to Pilot. In his reporting letter, he noted that he had come upon the Whitens unannounced and unexpected at the scene of the fire and found them sorting through the debris “trying to salvage anything that might have been left as a result of the fire”. He observed the appellant cleaning a small porcelain figure “with her fingers in an obvious attempt to salvage this item”. He reported that he “felt this genuine concern to try and see what could be salvaged now that the weather has afforded this opportunity [is] out of character for someone who might be involved in a suspicious fire”.
12 After receiving Francis’s report of April 28, 1994, Pilot removed Francis from the case and hired another adjuster, James Couch, who lived in Owen Sound, a couple of hundred kilometres distant. At trial, no one on behalf of Pilot testified as to why Pilot stopped using Francis.
13 Pilot also retained an engineering expert, Hugh Carter. His initial report was made on January 28, 1994. In that report, he concluded that the fire was accidental. He gave two further reports in which he stated the same opinion. Carter then received a letter dated May 4, 1994 from the respondent’s trial counsel, Donald Crabbe, which adverted to the arson theory:
One wonders whether the Whitens, even if they did not set the fire, sat back and allowed it to achieve a level that was convenient to them.
We need to be on top of this matter and to do it quickly. The other side has retained a lawyer and they are making noises of bad faith. The matter has to be revisited in its entirety, stripped down to the bare facts and rebuilt.
14 Hugh Carter concluded that he may have been misunderstood. He requested a meeting but did not get one at the time. The jury must have concluded that he had not provided the opinion his client wanted to hear.
15 The statement of claim was issued on May 27, 1994. On June 7, 1994, after a further site investigation, Carter did meet with Donald Crabbe and after the meeting, he reclassified the fire as “suspicious, possibly incendiary”. Pilot now concedes that Crabbe likely influenced Carter to change his opinion.
16 In its factum before this Court, Pilot also conceded that in addition to the Senior Claims Examiner and the Branch Manager, the latter’s “superior, George Hamilton (assistant to the Vice-President in charge of claims), [was] copied with all of the material on the file. Mr. Hamilton reported to Clifford Jones, Executive Vice President and Secretary” (para. 17). The misconduct was therefore not restricted to middle level management but was made known to the directing minds of the respondent company.
17 The attitude of the respondent and its counsel is apparent from Crabbe’s reporting letter dated June 9, 1994 to Pilot’s Chris Porter and Steven Carter (Pilot’s Branch Manager), parts of which read as follows:
The bottom line is that we have moved considerably with the upcoming engineer’s report towards successfully denying this claim. We still need more evidence, but we moved significantly in the right direction on June 7th.
18 It appears that all three people directing the respondent’s behaviour were agreed that the “right direction” was to deny the claim despite the lack of any evidence that the fire had been deliberately set. Crabbe continued:
In terms of the [appellant’s] punitive damage claim arising from bad faith, this is a cloud with a silver lining. First of all, it gives Hugh Carter a platform from which to discuss the evolution of his opinion. . . . More importantly in this concept of “silver lining” is that the claim renders admissible evidence as to the previous fires in which the Whitens were involved, when otherwise there was a considerable risk that the “similar fact” evidence would not be admitted as a significant enough pattern had perhaps not been established.
19 The reference to the two “previous fires” was firstly to a fire that occurred in a cottage owned by the Whitens’ son-in-law but rented out to a Mrs. Titro and secondly to another fire in another house previously occupied by Mrs. Titro. There was no apparent connection to the appellant or her family. At the Court of Appeal, Pilot conceded that evidence about these two fires was irrelevant and inadmissible. The reporting letter of June 9th continues:
You [Pilot] raise concerns that the other side has hired competent counsel and, frankly, I would not have it any other way and indeed it would be foolish to make any assumptions otherwise.
The jury must have asked itself why an insurer dealing in good faith with a policy holder would express “concern” to its own lawyer that she had hired competent counsel. Crabbe continued:
What we know is that counsel for the Plaintiff is advancing a claim based only on what the Plaintiff has told him. One can imagine the assertions of innocence and the exclusion of any reference to material that might be incriminating. I imagine the motivation was explored in terms of the financially bad times the family had fallen upon, but beyond that, the fire and all of its circumstances and the previous fires will not have been fully disclosed, if at all, to opposing counsel. By the time all of this evidence is disclosed, and coupled with the risk of a jury’s impression of it, competent counsel will view advancing the matter to trial as risky and [he] should be recommending a significant compromise, particularly in view of the fact that a trial will take quite some time. [Emphasis added.]
20 It was never explained how the Whitens stood to profit from torching their own home. The fair market value of their house was $157,000. The jury allowed $160,000. The mortgage still had to be paid out of the proceeds, leaving the appellant with only the existing equity in her home. Had the claim been paid promptly, the only financial effect on the appellant would have been to convert the roof over her family’s head into cash and oblige them to become renters. Selling the house would have had more or less the same financial impact. It defies common sense to think they would have risked so much — including their daughter’s safety, all of their possessions and their cats — for so little. Pilot now concedes (fairly, in my view) that the letter of June 9, 1994 “evinced an attitude which gave priority to Pilot’s interests at the expense of a dispassionate and fair approach to the interests of Mrs. Whiten”.
21 Thereafter, Pilot retained a forensic engineer, a fire investigator and a firefighter. Pilot did not disclose Francis’s exculpatory reports to any of these individuals, but instead, through Donald Crabbe, furnished them with information about the speed of the fire that the trial judge characterized as misleading if not inaccurate. The firefighter insisted that the fire was likely accidental but the other two experts gave opinions that provided some support for an arson defence. One of them, Richard Kooren, based his opinion on the existence of signs of a fire accelerant. Crabbe wrote on May 11, 1995:
Aside from the burn pattern under the washer, Richard Kooren sees liquid accelerant burn patterns on the annex floor which are not innocent. However, these observations are not made by [Pilot’s initial expert] Hugh Carter.
Pilot also conceded at the Court of Appeal that these inculpatory opinions were influenced by Crabbe.
22 The trial judge commented unfavourably about Crabbe’s role in this litigation. He felt that his “enthusiasm for his client’s case appears to have caused him to exceed the permissible limits which ought to confine a lawyer in the preparation of witnesses”. At the Court of Appeal and in this Court, Pilot conceded that these comments were justified, but added:
. . . Pilot, not its counsel, made the decision to deny the claim and Pilot was fully aware, because it was a recipient of the letters, of counsel’s “enthusiasm”. Pilot recognizes that it bears the responsibility for what occurred.
23 The appellant was reinstated in her nursing position in July 1994 and received about $40,000 in back pay in September 1994.
24 In the spring of 1995 the Whitens, in an attempt to satisfy Pilot that they did not set the fire, offered to take a polygraph test administered by an expert selected by Pilot. This was apparently accepted by the jury as a good faith offer made to allay Pilot’s suspicions. Pilot refused, without giving any reasons.
25 The Whitens lived in a small community. People were aware that their home was not being rebuilt because the insurer was alleging arson. The stigma persisted. Pilot continued to allege arson throughout the trial. Pilot now concedes that the evidence as a whole unequivocally demonstrates that the fire was accidental.
II. Judicial History
A. Ontario Court (General Division) (1996), 132 D.L.R. (4th) 568
26 This action was tried before Matlow J. and a jury. His instruction to the jury on the issue of punitive damages was skeletal but occasioned no objection from either counsel:
And finally, if you determine that Pilot’s defence of arson failed and that Pilot breached the provision of the policy of insurance by denying the plaintiff’s claim, you must then go on to determine whether the plaintiff is entitled, as well, to recover punitive damages. Punitive damages can be awarded in certain circumstances to serve as a punishment. In this case, depending on your finding of fact, punitive damages can be awarded to deter Pilot and other insurers from engaging in improper conduct in dealing with the claims of their insureds.
Punitive damages, unlike the other types of damages claimed in this case, are not intended to compensate the plaintiff for her loss. If they are awarded, they will constitute a windfall for the plaintiff and a penalty for Pilot.
Before you may properly make an award of punitive damages, Pilot’s defence of arson must fail and you must be satisfied that the plaintiff has proven that Pilot failed to deal with her claim in good faith and instead dealt with this in a malicious, high-handed, arbitrary or capricious manner, and that Pilot’s conduct warrants the imposition of a penalty.
27 After the charge, the jury returned with the following question:
Dear Justice Matlow, we are having difficulty in agreements pertaining to assessing the amount of the claim for punitive damages. Would you be able to provide us some guidelines to help us arrive at a consensus. Thank you, the jury.
28 Counsel were consulted and agreed with each other that no dollar amounts should be mentioned. Pilot’s counsel told the trial judge, “in terms of suggesting amounts or anything, I think it ought not to occur”. In these circumstances, the trial judge responded to the jury by repeating that punitive damages were in their discretion:
Members of the jury, I have considered the question that you sent to me and I don’t know that I can really be of all that much help to you. All that I can say to you is that punitive damages are in the discretion of the jury. You have to be fair and reasonable to both sides, and apart from that, there’s not much more or anything more that I can tell you. It is not surprising that it is difficult to arrive at a consensus. I urge you to keep talking to each other and endeavour to find what that magic figure should be.
29 The jury awarded $318,252.32 in compensatory damages and $1 million in punitive damages. In his endorsement granting judgment in accordance with the jury’s verdict, Matlow J. awarded pre-judgment interest and costs on a solicitor and own client scale, his intention being “to provide for the plaintiff’s fullest possible indemnification for her reasonable costs of this action” (p. 570). (The appellant’s costs were ultimately fixed at $317,658.92.)
30 Matlow J. then made a number of observations about the jury’s award of punitive damages. He said that although it was “very high and perhaps without precedent, [it] is not perverse but is entirely reasonable in light of all of the evidence” (p. 572). He noted that the defendant continued to deny the claim even after its own adjuster recommended that it be paid. “[T]he defendant relied on a few suspicious circumstances that were later clarified adequately by the plaintiff in order to press on with an ill-founded defence” (p. 572). “As a result, the plaintiff, who was already in poor financial condition, was required to endure the indignity of having to make temporary living arrangements without the benefit of the insurance coverage for which she had paid premiums to the defendant” (p. 572). She was also required to undertake litigation to secure the relief to which she was entitled, including a trial which took approximately two months to complete. “In light of the defendant’s admission that its net worth was approximately $231 million, I cannot take issue with the jury’s conclusion that a very substantial award for punitive damages was required to punish the defendant and to effectively send the implied reminder to the defendant and to other insurers that they owe their insureds a duty of good faith in responding to claims made under policies of insurance issued by them” (p. 572).
B. Ontario Court of Appeal (1999), 42 O.R. (3d) 641
(1) Laskin J.A. (dissenting in part)
31 On the issue of punitive damages, Laskin J.A. noted that in Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085, and again in Wallace v. United Grain Growers Ltd.,