The Emergence of Bad Faith Litigation in Canada

In Canada, we are still struggling to develop a clear definition of the doctrine of bad faith. Debate continues as to whether bad faith damages flow from breach of contract or in tort. The distinction may be significant when it comes to calculating damages. To make matters more complicated the line between tort and contract law continues to blur. [1] The key thing to remember about bad faith, however, is that regardless of whether it is contractual or tortuous, it is a separate actionable wrong that may cause increased damages under the more traditional heads of damages: general damages, consequential damages, aggravated damages, and in come cases, punitive damages.

Bad faith litigation originated in the United States. [2] Bad faith is a much more developed doctrine in the U.S. than it is in Canada. In fact, the first third party bad faith case dates back to 1957. [3] Third party bad faith is best illustrated by an example: consider the case where an insured has a $500,000 automobile insurance policy when he negligently rear-ends another car causing the driver catastrophic injuries. Liability is clear. The injured Plaintiff sues and offers to settle within the policy limits, but the insurance company refuses the offer and takes the case to trial. If the trial judge finds damages greater than $500,000, there is a very good chance that any excess will be the responsibility of the insurance company rather than the insurer. By not settling within the policy limits, the insurance company has unreasonably exposed its insured to the risk of any excess judgment. This risk should properly be borne by the insurance company that gambled on getting a judgment below policy limits rather than the insured who would almost certainly have instructed his insurance company to settle within the policy limits if his opinion had been sought. [4]

First party bad faith was not recognized until 16 years later in the seminal decision of Gruenberg v. Aetna Ins. Co. [5] First party bad faith deals with the unreasonable withholding of benefits payable to the insured rather than to another party. Unreasonable withholding of benefits generally falls into one of three categories: wrongful denial of coverage, failure to pay the full value of the claim, or unreasonable delay in the investigation or payment of a claim. While these categories seem straightforward, there is considerable debate with respect to what conduct constitutes bad faith and what does not.

The development of the doctrine of bad faith as a tort in the United States grew out of the recognition that viewing unreasonable, abusive and coercive tactics by insurance companies as simple breaches of contract was inadequate. Without bad faith claims, there was little incentive for insurance companies to adjust claims fairly and promptly. When claims were made, insurers were able to use near limitless resources to resist payment or force grossly inadequate settlements. Insurers could act in this manner with impunity because American law at the time limited an insured’s recovery to the amount owing under the policy plus interest. In an attempt to level the playing field, insureds began to formulate alternative damage theories in order to expose insurers to more significant damage awards. The idea was to impose a consequence on insurers who acted improperly that was more significant than the mere licensing fee involved in paying the claim. The development of bad faith litigation, especially in the State of California, grew out of a desire to make insurers play fairly. [6]

The American development of the bad faith doctrine in insurance litigation has not been embraced by most Common Law jurisdictions. There are exceedingly few Commonwealth cases on the doctrine of the duty of good faith and fair dealing. This fact is, no doubt, largely due to the fact that most commonwealth jurisdictions have shown great reluctance to make civil awards of what is usually regarded as non-compensatory damages. This reluctance is clearly apparent in English law, where many Judges have quoted the dissenting opinion of Lord Wilberforce in Broome v. Cassell [7] when he summed up the concern about non-compensatory damages in these words:

It cannot lightly be taken for granted, even as a matter of theory, that the purpose of the law of tort is compensation, still less that it ought to be, an issue of large social import, or that there is something inappropriate or illogical or anomalous (a question-begging word) in including a punitive element in civil damages, or, conversely, that the criminal law, rather than the civil law, is in these cases the better instrument for conveying social disapproval, or for redressing a wrong to the social fabric, or that damages in any case can be broken down into two separate elements. As a matter of practice English law had not committed itself to any of these theories: it may have been wiser than it knew.

Early English cases generated some substantial non-compensatory awards in civil cases, [8] however, the English Courts have attempted to limit “exemplary” awards. The concept of bad faith is seldom discussed in textbooks, and most British academics have simply accepted the a 1956 study by Raphael Powell which concludes that English law does not contain any overriding general duty of good faith for parties to a contractual relationship. [9]

In the leading, but often criticized, case of Rookes v. Barnard, [10] the House of Lords limited punitive awards to cases involving oppressive action by government, where the defendant’s conduct is calculated to make a profit, or where punitive damages have express statutory authorization. Attempts by lower courts to “get around” the Rookes limitations have generally been struck down by the High Court. The House of Lords has sent a clear message that civil litigation in England should concentrate on compensatory awards alone.

Generally speaking, in Canadian contract law, the concept of awarding bad faith damages has been limited to cases involving insurance contracts and employment contracts.

In a seminal decision, in 1989, the Supreme Court of Canada considered the question of whether punitive awards for bad faith conduct could be awarded in wrongful dismissal cases in Vorvis v. Insurance Corp. of British Columbia. [11] Mr. Vorvis was hired by a junior solicitor by in 1973. His supervisor became increasingly frustrated with Mr. Vorvis’ pace of work. He implemented weekly productivity meetings which were aimed at making Mr. Vorvis work more quickly. However, Vorvis found these meeting so stressful that he had to seek medical attention. The supervisor decided that he had had enough and dismissed Vorvis. There was no culminating event. I.C.B.C. initially took the position that it had cause to terminate Vorvis for incompetency, but nevertheless offered to settle the case for eight months pay and benefits in exchange for a full and final release. Vorvis refused the offer and litigated. He found alternative employment seven months after termination.

The case eventually reached the Supreme Court where the primary issue was whether Vorvis was entitled to aggravated and punitive damages. The Supreme Court agreed with the B.C. Court of Appeal and found that neither aggravated or punitive damages should be awarded on the facts of this case. After conducting a detailed review of the prior case law, the Court concluded that such damages could only be awarded in breach of contract cases where there was a separate actionable wrong that formed the basis for such an award. Termination of the employment relationship by due notice was not a separate actionable wrong. Mr. Vorvis was entitled to damages for failure to give proper notice, but the conduct of I.C.B.C. did not constitute a separate actionable wrong, and therefore no aggravated damages resulted. It is worth noting that this determination was made even though the Court characterized the supervisor’s treatment of Vorvis as offensive and unjustified. However, the Court noted that that the supervisor’s conduct preceded the wrongful dismissal and therefore “cannot be said to have aggravated the damage incurred as a result of the wrongful dismissal,” [12] and the claim for aggravated damages in respect to the wrongful dismissal was dismissed.

The ruling with respect to the punitive damages claim was similar. The Court examined the relevant case law and determined that Canada was not bound by the limitations on punitive damages set the seminal House of Lords decision of Rookes and Bamard. [13] In Canada, punitive damages for breach of contract [14] would be awarded rarely. The Court noted,

When then can punitive damages be awarded? It must never be forgotten that when awarded by a judge or a jury, a punishment is imposed upon a person by a Court by the operation of the judicial process. What is it that is punished? It surely cannot be merely conduct of which the Court disapproves, however strongly the judge may feel. Punishment may not be imposed in a civilized community without a justification in law. The only basis for the imposition of such punishment must be a finding of the commission of an actionable wrong which caused the injury complained of by the plaintiff. [15]

In Vorvis, the Court did not find an actionable wrong, and the punitive damages case was therefore dismissed.

The idea of using bad faith to increase damages in employment contract law situations took a huge step forward with the recent Supreme Court of Canada decision of Wallace v. United Grain Growers Ltd. (c.o.b. Public Press), [16] In Wallace, the employer approached Wallace and asked him to leave his job of 25 years to work for U.G.G.. Wallace asked for, and received, assurances of fair treatment and remuneration and a promise that, if he performed as expected, he could work for U.G.G. until retirement. Wallace worked for U.G.G. from 1972 until August 1986 when he was summarily discharged without explanation. Wallace was U.G.G.’s leading salesperson and his supervisors had recently complemented him on his work. However, the employer alleged in its termination letter and in its Statement of Defence that Wallace was unable to perform his duties satisfactorily and termination for cause was justified. Wallace was devastated by the allegations and had to seek psychiatric help. Almost 59 years old and terminated for alleged cause, Wallace found it difficult to find similar employment.

At the beginning of trial, the employer withdrew the termination for cause argument. The trial judge awarded damages based on a 24- month notice period and also aggravated damages. The Manitoba Court of Appeal reduced the notice period to 15 months and overturned the aggravated damages. The Supreme Court returned the notice period to 24 months, but refused to allow aggravated damages.

The reasons of Mr. Justice lacobucci, writing for the majority, are interesting. Relying on Vorvis, the majority concluded that neither the dismissal nor the events surrounding the dismissal constituted a separate actionable wrong in either tort or contract, and therefore neither punitive nor aggravated damages could be awarded. This position was based on the conclusion that an employment contract is not one in which peace of mind is one of things for which an employee contracts. [17]

The conclusion would suggest that the Court was not prepared to provide Wallace with a remedy for the treatment he had endured at the hands of his employer; however, Justice lacobucci when went on to discuss the relationship between good faith conduct and the reasonable notice period. He rejected the argument that an employee could sue for bad faith discharge, but then went on to observe,

The appellant urged this Court to recognize the ability of a dismissed employee to sue in contract or alternatively in tort for “bad faith discharge”. Although I have rejected both as avenues for recovery, by no means do I condone the behaviour of employers who subject employees to callous and insensitive treatment in their dismissal, showing no regard for their welfare. Rather, I believe that such bad faith conduct in the manner of dismissal is another factor that is properly compensated for by an addition to the notice period. [18]

The underlying rationale for the Court’s ruling was the recognition that an employment contract is usually not the product of negotiations between equals. Individuals lack the bargaining power and the information necessary to bargain, and the Court recognized that employees were a “vulnerable group.” The time when an employee is terminated is, moreover, the time when he or she is normally the most vulnerable and in need of protection. The Court therefore held that employers ought to be held to “an obligation of good faith and fair dealing” when dismissing employees. The failure to meet this duty would increase the damages that an employer has to pay, not for punitive or aggravated damages, but for increased notice period damages. [19] In wrongful dismissal litigation, therefore, injured feelings and emotional upset for loss of employment are not compensable;

However, where an employee can establish that an employer engaged in bad faith conduct or unfair dealing in the course of dismissal, injuries such as humiliation, embarrassment and damage to one’s sense of self-worth and self-esteem might all be worthy of compensation depending upon the circumstances of the case. In these situations, compensation does not flow from the fact of dismissal itself, but rather from the manner in which the dismissal was effected by the employer.

Often the intangible injuries caused by bad faith conduct or unfair dealing on dismissal will lead to difficulties in finding alternative employment, a tangible loss which the Court of Appeal rightly recognized as warranting an addition to the notice period. It is likely that the more unfair or in bad faith the manner of dismissal is the more this will have an effect on the ability of the dismissed employee to find new employment. However, in my view the intangible injuries are sufficient to merit compensation in and of themselves. I recognize that bad faith conduct which affects employment prospects may be worthy of considerably more compensation that that which does not, but in both cases damages have resulted that should be compensable. [20]

In the Wallace case, the abrupt manner of termination, the conscious decision of the employer to pay “hardball” with Wallace, the wrongful allegation of cause, and the fact that the employer allowed rumours of alleged wrongdoing to circulate all contributed to a finding of an increased notice period based on bad faith.

The most important case in Canadian history with respect to bad faith litigation is the seminal decision of Whiten v. Pilot. [21] This decision clearly established that the doctrine of bad faith exists in Canadian law as a separate actionable wrong and that bad faith conduct by an insurance company can result in significant liability.

The facts underlying the Whiten case are egregious. Daphne and Keith Whiten owned a modest home in the Haliberton area of Ontario. Sometime after midnight on a cold January night in 1984, they discovered a fire as they were getting ready for bed. The Whitens fled their home wearing only night clothes. They were able to save their three dogs, but the three family cats perished in the fire. Mr. Whiten’s daughter set out to a neighbour’s in order to get help, and Mr. Whiten suffered a serious case of frost bite due to standing outside without adequate footwear in the minus eighteen degree Celsius night. Keith Whiten had to be taken to hospital and he was confined to a wheelchair for two weeks. The house and its contents, including some valuable antiques and sentimental family items, were totally destroyed.

The local fire chief and firefighter who attended at the Whiten home both considered the fire accidental. The fire chief believed that the source of the fire was a malfunctioning kerosene heater in the porch of the addition. [22] They did not even see the need to call in the Fire Marshal’s office to investigate.

The Whitens were insured by Pilot insurance. Pilot retained an experienced independent adjuster named Derek Francis to investigate the fire. Francis inspected the fire scene, interviewed the insureds, and met with the fire department. During his investigation, the Whitens told him that they had been unemployed and were facing financial difficulties. However, fire fighters who attended at the scene also told Francis that the speed of the fire did not support a conclusion of arson. Based on the physical evidence, Francis reported to Pilot on February 3, 1994 that “all of the factors served to confirm that this is an accidental fire and there is no suspicion of arson on behalf of the insureds or any members of their family.” [23] Francis looked further into the financial situation of the Whitens and found that although their mortgage was in arrears, refinancing had been arranged. He reported to Pilot again on February 25, and concluded that based on the evidence there was “little or no base to deny this claim.”

Francis also adjusted the contents claim and advised Pilot that he felt the contents claim was both legitimate and reasonable and recommended that the insurer pay the contents claim which he felt clearly exceeded the policy limits of $117,000. Pilot ignored his recommendations and decided to deny the claim. Even worse, Pilot refused to tell Francis why it rejected his recommendations. Francis did not know what to tell the insured’s and became increasingly evasive to their questions.

After the fire, the Whitens moved into a rented cottage. Pilot agreed to pay the rent, but in March, Pilot had Francis inform the landlord that it was no longer going to make payments. Neither Francis or Pilot ever told the Whitens that the rent was being cut off. Pilot knew, based on its investigation, that the Whitens were in desperate financial circumstances and that Keith Whiten had declared bankruptcy the previous November.

Pilot instructed Francis to continue his investigation into the fire. He reported by letter to Pilot’s legal counsel dated April 28, 1994, that he still did not suspect arson, and he attempted to convince Pilot to accept this position by reporting as follows:

When we attended on the scene without any knowledge of the Whitens, we found Mr. and Mrs. Whiten sorting through the debris in old clothes, trying to salvage anything that might have been left as a result of the fire.
I observed Mrs. Whiten with a small porcelain figurine in her hands, wiping the same off with her fingers in an obvious attempt to salvage the item. Had the Whitens known I was going to attend at the scene, I would have expected this type of display of sentiment, however not knowing that I was going to be at the scene, I felt this genuine concern to try and see what could be salvaged now that the weather has afforded the opportunity out of character for someone who might be involved in a suspicious fire. [24]

When Pilot received this report, it fired Mr. Francis and hired another adjuster to replace him. No explanation was ever offered by Pilot for the switch.

Pilot also asked the Insurance Crime Prevention Bureau, [25] to look into the matter. I.C.P.B. reported back as early as February 25, 1994, that Pilot did not have “a leg to stand on” with respect to declining this claim. However, having asked for I.C.P.B. to investigate, Pilot’s claims manager decided that it was not credible and decided to give it no weight.

In addition, Pilot also retained an engineering expert, Hugh Carter of Retrach Engineering to investigate the fire. He reported in January that he believed that the fire was accidental and the circumstances of the fire strongly suggested that it was not arson. Carter submitted two supplementary reports which made the same opinion, but Carter received a letter from Pilot’s lawyer which suggested to him that Pilot misunderstood his position. He asked to meet with Pilot, but they refused his request. Instead, Carter was asked to meet with Pilot’s counsel, Donald Crabbe in early June, 1994. After this meeting, the engineer “reclassified” the fire as suspicious and possibly incendiary. Pilot relied upon this revised opinion at trial; however, at the appeal level, the insurer conceded that Mr. Crabbe likely exerted improper influence upon his expert to change his opinion.

At this point, Pilot’s lawyer wrote a letter which made his position with respect to this litigation abundantly clear. In this letter, which the Ontario Court of Appeal called “astonishing,” [26] counsel wrote that getting the report supporting the denial of the claim was a move “in the right direction” and that the engineer could “freely speculate” that the fire was not accidental. Mr. Crabbe actually wrote that it was appropriate to deny the claim six months after the fire occurred because there was little chance that the Whitens would refuse an offer. He also felt that it might be advantageous for the Whitens to advance a punitive damages claim based on bad faith because that would allow Pilot to introduce evidence about two other fire claims made by relatives of the Plaintiffs. Mr. Crabbe felt that Plaintiff’s counsel, Gary Will, would find such evidence added to the risk associated with the file and would recommend that the Whitens significantly compromise their claim.

Since it still had no evidence supporting its claim of arson, Pilot then went out from July 1994 to May 1995 and hired various experts to build its arson defence. [27] Mr. Crabbe did not provide any of Francis’ report to these experts, and he furnished them with information about the speed of the fire that the Ontario Court of Appeal would later characterize as “misleading if not inaccurate.”

In late 1995, almost two years after the fire, the case came before the Court in an eight-week jury trial. The trial judge, was clearly uncomfortable with the role that Pilot’s lawyer played in the law suit. In his charge to the jury, Mr. Justice Matlow noted,

Apart from this, with some reluctance. I feel that I must comment on what I choose to characterize as the unfortunate role that Mr. Crabbe assumed in directing and coordinating the development of the defence expert evidence to support the allegation of arson.
While I would not attribute to Mr. Crabbe any dishonest attempt to deliberately influence the evidence of the experts called by him, I respectfully express the view 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. It may be that Mr. Crabbe unwittingly assumed too active a role in Pilot’s continuing investigation of this fire and, in the process did more than just prepare himself and his witness for trial. Although a lawyer may properly raise issues with witnesses and point out conflicts and weaknesses in the evidence, he must be careful not to exercise undue influence on witnesses so as to cause them, consciously or unconsciously, to modify their evidence to suit the needs of the party who retained them.

In this case, there is evidence by Mr. Crabbe’s own letters, that he, at least implicitly, put to some of his expert witnesses what evidence to give and that he purported “to lead them into battle” to secure victory on behalf of Pilot. In my view, it was improper for him to approach witnesses in this suggestive manner, especially expert witnesses whose livelihoods are earned by providing service exclusively to insurers such as Pilot. If you agree with my view of this factual issue, and it is your right to choose to agree of disagree with me, it is for you to decide the extent to which you should reduce the weight that you would otherwise give to the evidence of some or all of these defence – to some or all of these defence experts. [28]

The jury was asked to consider all of this evidence. It also heard that Keith and Daphne Whiten had fully co-operated with Pilot’s investigation which included submitting to two lengthy interviews. They even offered unconditionally to submit to polygraph tests. Pilot refused the offer without giving a reason. The jury also heard how the Whiten’s had suffered because they lived in a small community where everyone knew that their home was not being rebuilt because the insurer was alleging arson.

Pilot maintained its arson argument throughout the trial. At the end of the Plaintiff’s case, Pilot moved to dismiss the claim for punitive damages for bad faith, but the trial judge dismissed the motion. In spite of this, Pilot did not tender any evidence about the way it had handled the Whiten’s claim.

The jury awarded $160,000 for the lost home, $117,500 for the loss of contents, $9,800 for increased living expenses and $1 million dollars for punitive damages for bad faith conduct. Over the strenuous objections of Pilot’s counsel, the trial judge incorporated the jury’s assessment into his judgment. The trial judge conceded that the jury’s assessment of punitive damages was very high and without precedent, but he concluded that the award was not perverse and was “entirely reasonable in light of all of the evidence.”

Pilot Insurance appealed to the Ontario Court of Appeal on two grounds. First, it argued that punitive damages should not have been awarded at all. In the alternative, it argued that the $1 million dollar award was excessive. In a split decision, the Appellate Court held that punitive damages should have been awarded in this case, but it reduced the award from $1 million dollars to $100,000.

It is worth noting that during the appeal, for the first time, Pilot conceded that the evidence unequivocally demonstrated that the fire was accidental. Pilot also conceded that the trial judge’s comments about the improper role played by Mr. Crabbe were justified.

Pilot’s attack against the jury’s punitive award was waged on both legal and factual fronts. With respect to the legal argument, Pilot pointed out that Canadian law required that before a Court could award punitive damages, there needed to be a finding that the defendant had committed an independent or separate actionable wrong which caused damage to the Plaintiff. [29] In the alternative, Pilot argued that its conduct was not sufficiently harsh, vindictive, reprehensible and malicious to sufficiently offend the court’s sense of decency to warrant an award of punitive damages.

With respect to the independent actionable wrong argument, Pilot relied on the jurisprudence flowing out of the Vorvis case. [30] Pilot argued that it had done nothing more than breach its contract of insurance with the Whitens. Pilot conceded that it owed Daphne Whiten a duty to deal with her in good faith, but this duty was a contractual obligation, and its breach was not an independent actionable wrong as required by Vorvis. Pilot argued that in order to sustain a punitive damages award, an insured would have to show that the insurance company had committed an entirely separate tort such as defamation or deceit. A unanimous Ontario Court of Appeal disagreed with this submission, and it held that an action for dealing with an insurance company in bad faith is different than an action on the policy for benefits. “In other words, breach of an insurer’s obligation to act in good faith is a separate or independent wrong from the wrong for which compensation is paid.” [31] The Court concluded that Vorvis only required an independent actionable wrong, not an independent tort. However, if necessary, the Court of Appeal was prepared to rule that an insurance company had a duty in tort of good faith towards its insureds. [32] Therefore, the separate actionable wrong requirement had been met.

With respect to the argument that Pilot’s conduct had not been sufficiently high handed, malicious or reprehensible to warrant an award of punitive damages, the Court dismissed this argument summarily. The basis for the award for punitive damages was the fact that Pilot handled the Whiten’s claim unfairly and in bad faith. The evidence was overwhelming and included the following:

  • Pilot ignored the opinion and recommendations of the independent adjuster;
  • Pilot replaced the adjuster after he recommended that it pay the claim;
  • Pilot failed to give its own experts all the relevant evidence;
  • Pilot asked ICPB to investigate and then ignored ICPB’s conclusions;
  • Pilot ignored the opinions of its own experts and influenced them to change their positions;
  • Pilot admitted that its counsel acted improperly;
  • Pilot engaged in bad faith when it attempted to use evidence of two previous fires to convince Plaintiff’s counsel that this was a risky case;
  • Pilot attempted to starve the Plaintiffs into accepting an offer it felt they could not refuse; and
  • Pilot terminated rent payments on the cottage without notifying the Whitens. [33]

The only substantial disagreement between the Justices at the Court of Appeal level was the quantum of the award. The majority, Justices Finlayson and Catzman, reduced the award on the basis that $1 million dollars was too great a leap from early bad faith awards which had been in the $7,500 to $15,000 range. In limiting the bad faith award to $100,000, the majority made specific reference to the fact that the evidence indicated that the terrible mistreatment of the Whitens was not based on company-wide Pilot policies, but rather on the over-enthusiastic efforts of Pilot’s lawyer. In other words, they saw this as an isolated incident. Further, the majority concluded that Pilot did not profit by its intransigence. Justice Laskin, however, wrote a spirited dissent on this issue arguing that the $1 million dollar award ought to stand [34] and the Court ought to show deference to the jury.

In a six to one decision, the Supreme Court of Canada agreed with Justice Laskin and restored the $1 million dollar punitive award. [35] However, the decision of the Court was not without some reluctance. In fact, writing for the majority, Justice Binnie saw the central theme of the case as dealing with “the spectre of uncontrolled and uncontrollable awards of punitive damages in civil actions.” [36] Despite these misgivings, the Court set aside the decision of the Court of Appeal.

One factor that clearly played a part in the decision to restore the original verdict was the admission by Pilot, in its final factum, that the misconduct in the case was not confined to its trial lawyer. Justice Binnie observed that,

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 in the file. Mr. Hamilton reported to Clifford Jones, Executive Vice President and Secretary.” The misconduct was therefore not restricted to middle-level management but was made known to the directing minds of the respondent company. [37]

Justice Binnie was particularly concerned that correspondence made it clear that Pilot’s lawyer and its senior managers were agreed that denying the claim was a move in the “right direction” even though they knew that they did not have enough evidence to prove that the fire had been deliberately set. The fact that Pilot expressed concern that the insureds had hired competent counsel was an even stronger sign of bad faith conduct. For these reasons and the reasons cited by the lower courts, the Supreme Court concluded that Pilot was guilty of bad faith conduct in this case. In restoring the jury award, the Court clearly relied on the fact that Pilot, like all insurance companies, sells a product to the public that is intended to provide them with peace of mind. Justice Binnie noted, in fact, that Pilot markets itself as a sure guide into “safe harbours” in times of trouble. Pilot’s bad faith in this case arose from its failure to put its insureds interests along side its own and its failure to provide peace of mind. The Court found,

The obligation of good faith dealing means that the appellant’s peace of mind should have been Pilot’s objective, and her [Ms. Whiten’s] vulnerability ought not to have been aggravated as a negotiating tactic. It is this relationship of reliance and vulnerability that was outrageously exploited by Pilot in this case. The jury, it appears, decided a powerful message of retribution, deterrence and denunciation had to be sent to the respondent and they sent it. [38]

It is equally clear that the Supreme Court did not consider the Whiten case to be indicative of an ongoing pattern of behaviour, but rather it saw the case as an unfortunate case where a few misguided lawyers and middle managers ran amuck. The Court made this clear when it noted,

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 costs 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. [39]

The Supreme Court agreed with the line of cases holding that Pilot’s conduct constituted a separate actionable wrong and found that it was not necessary to characterize this wrong as tortious or breach of contract.

The Court spent most of its time conducting an extensive analysis of the history and purpose of punitive damages. [40] It is unfortunate, for the purpose of our analysis of bad faith, that the primary analysis was around this issue rather than a discussion of the nature and application of the doctrine of bad faith in Canadian law.

While damages for bad faith conduct have become more common since Whiten, the feared tidal wave of huge judgments has not appeared. Damages for bad faith conduct remain the exception rather than the norm. In fact, it may be argued that Wallace has had a more profound impact on Canadian litigation. [41]

There have, however, been a few spectacular bad faith awards. In 2003, a jury awarded a family wrongfully accused of arson punitive damages of $350,000 and aggravated damages of $175,000. [42] Three months later, in another alleged arson case, a jury awarded a former auto body man the amount that he had claimed for his farm plus $2,000,000 in punitive damages. His tenant was awarded another $500,000 in punitive damages. [43]

The further of bad faith litigation in Ontario remains unclear. While significant awards are rare, cases like Plester and Mazza make it clear that large awards can and will be made in the appropriate cases. The crucial task facing a litigator bringing one of these cases to trial is proving that the defendant’s conduct constituted an unreasonable withholding of benefits and that this conduct caused harm to the Plaintiff.


[1] This process is similar to the blurring that has occurred between legal and equitable concepts. When asked at a recent conference whether bad faith damages lay in tort or contract, leading American bad faith litigator William F. Merlin, Jr. discussed the emergence in American jurisprudence of the doctrine of “contort”; i.e., the joining of contract law and tort law. He went on to point out that bad faith litigation in the United States is often governed by specific legislation and the terms of the statutory conditions for finding bad faith conduct render this debate largely moot.

[2] For an excellent discussion of the evolution of American bad faith litigation, see How Insurance Companies Settle Cases, chapter 15.

[3] Brown v. Guaranty Ins. Co., 15 Cal. App. 2d 319 P. 2d 69 (Cal. App. 1957).

[4] See also Communnale v. Traders General, 328 P.2d 198 (1958); Cain v. State Farm, 47 Cal. App. 3d 783; Shernoff, “Insurance Bad Faith Litigation,” 1-27.

[5] 108 Cal. Rp. 480, 510 P. 2d 1032 (Cal. 1973).

[6] See Richard Tinney, “Insured’s Beach of the Covenant of Good Faith and Fair Dealing – First-Party Claims,” found in Insurer’s Bad Faith, pp. 323ff for a more detailed discussion of this historical development.

[7] [1972] A.C. 1027 (H.L.) 1114 [note this is quoted by Justice Binnie for the majority in Whiten, p. 275]

[8] Consider the early case of Wilkes v. Wood (1763), Lofft. 1,98 E.R. 489 (K.B.) where punitive damages were affirmed in a case where the government broke into the offices of a Parliamentarian.

[9] See Powell, “Good Faith in Contracts” (1956), 9 Curr. Leg. Prob. 16 (as found in Belababa, “Good Faith in Canadian Contract Law” (Special Lectures of the Law Society of Upper Canada, 1985: Commercial Law: Recent Developments and Emerging Trends).

[10] [1964] A.C. 1129 (H.L.), although the recent decision of Kuddus v. Chief Constable of Leicestershire Constabulary, [2001] 3 All. E.R. 193, may be an attempt to move away from this case.

[11] [1989] 1 S.C.R. 1085,58 D.L.R. (4th) 193 dismissing appeal from [1984] B.C.J. No. 1598 (B.C.C.A.) partially dismissing appeal from [1982] B.C.J. No. 1625.

[12] Ibid., 1104.

[13] [1964] A.C. 1129 where punitive damages were restricted to cases involving abuse of power by government and torts committed for profits. [Ibid., 1105].

[14] A concept that we will later argue constitutes bad faith conduct.

[15] Ibid., 1105-1106.

[16] [1997] 3 S.C.R. 701 (S.C.C.), on appeal from (1995), 102 Man. R. (2d) 161, [1995] 9 W.W.R. 153, 14 C.C.E.L. (2d) 41 (Man. C.A.); allowing the appeal and cross-appeal from (1993), Man R. (2d) 161, [1993] 7 W.W.R. 525,49 C.C.E.L. 71 (Man. Q.B).

[17] Ibid., para. 73.

[18] Ibid., para 88. It is worth noting three of the Supremes dissented on the question of “bad faith discharge” and would have gone so far as to hold the expectation of good faith in dismissing employees should be viewed as part of the contract of employment, and to therefore be the basis of actions in tort for bad faith discharge. [See reasons of McLachlin,J. generally and especially paragraphs 135-146].

[19] Ibid., paras 91-97.

[20] Ibid., paras 103-104.

[21] (1999), 42 O.R. (3d) 641 (Ont. C.A.) reversed by (2002), 209 D.L.R. (4th) 257 (S.C.C.).

[22] See S.C.C. decision, para. 5, p. 266. Justice Binnie goes on to note that this position “was eventually shown to be correct.”

[23] 42 O.R. (3d) 641 at 5/22.

[24] Ibid., 5/22.

[25] This is a body set up by the Canadian insurance industry itself to assist with the investigation of suspicious claims.

[26] Ibid., 6/22.

[27] A forensic engineer, a fire investigator and a fire fighter.

[28] Found in Court of Appeal decision [Ibid., 6-7/22].

[29] For a detailed discussion of the concept of independent actionable wrong, see 2(3)(a), supra.

[30] See 2.(3) (a) for a detailed discussion on this line of cases.

[31] Found in Court of Appeal decision. Ibid., 8/22.

[32] Ibid., 9/22.

[33] Ibid., 10-11/22.

[34] A more comprehensive discussion concerning the quantum of damages issue can be found in Chapter 4.

[35] (2002), 209 D.L.R. (4th) 257 (S.C.C.)

[36] Ibid., 264.

[37] Ibid., 268. (emphasis mine)

[38] Ibid., 306.

[39] Ibid., 297-298. Note that Justice Lebel, in his dissent, argued with equal strength that punitive damages for bad faith conduct would not serve a positive purpose. He wrote, “Despite the moral satisfaction we may derive from giving a good whack to an insurance company and some misguided middle managers, the verdict of the jury does not much advance the case of sound and fair management in the insurance industry. The award fails the rationality test because its sole purpose remains to punish adequately bad faith and unfair dealing by employees of Pilot and its counsel. It does not address any widespread practice in the insurance industry. It does not pretend to effect a disgorgement of unfairly acquired profit.” [Ibid., 316].

[40] Ibid., 274-292.

[41] According to some reports, notice period damages have increased by 33% in the post-Wallace era.

[42] Plester v. Wawanesa (January 2003, London Ontario, Jenkins, J. (jury award)).

[43] Mazza v. Hamilton Township Farmers Mutual (May 2003, St. Catherines, Bain, J. (jury award))