1. Bad faith litigation and large punitive damage awards against insurers in Canada are rare compared to the US. The highest court in Canada has limited punitive damages against insurers to $1 million, and there have been few cases where insurers were found liable for bad faith refusal to settle. 2. The duty of good faith is an implied term in insurance contracts in Canada, but there is no statutory cause of action for insurer bad faith as there is in some US states. Punitive damages require a showing of both overwhelmingly inadequate claims handling and exceptionally egregious insurer conduct. 3. Allegations of bad faith claims handling are commonly included in coverage lawsuits in Canada, but rarely result in punitive damage awards.

1. INTERNATIONAL
USLAW FALL/WINTER 2012
PERSPECTIVE
B A D FA I T H L I T I G AT I O N I N C A N A DA
Much Ado About
Nothing?
Nigel P. Kent and Samantha Ip Clark Wilson LLP
A. INTRODUCTION est court north of the border (the Supreme Canada nor, indeed, have the Canadian
Many people involved in the Canadian Court of Canada) has effectively limited courts adopted any such general rule as a
insurance industry are alternately amazed available punitive damage awards against matter of common law. In addition, most
and appalled at the bad faith punitive dam- first party insurers in that country to $1 mil- US states have enacted statutes or regula-
age awards that occasionally emerge from lion and then only in cases of most egre- tions expressly governing insurance claims
the US Courts. They are amazed some states gious misconduct. With respect to liability and proscribing certain unfair or deceptive
allow liability limits on auto policies less than insurance, you can literally count on one claims handling practices. These, along with
10% of the Canadian mandatory minimums hand the number of “bad faith refusal to general tort law principles, form the basis
($200,000), and they are astounded that a settle” cases in Canada and the largest such for much “bad faith” litigation south of the
person who purchases only $25,000 of such award has been a mere $300,000. border.
liability coverage can later receive a jury ver- Canada, the world’s second largest
dict of $145 million in punitive damages B. THE ORIGIN OF THE GOOD FAITH country in size, comprises ten provinces and
against the auto insurer for “bad faith” han- OBLIGATION three territories, each of which has its own
dling of an excess liability claim under the “Bad faith” litigation and run away jury legislative and regulatory regime for insur-
policy (the Campbell v. State Farm saga). Some awards of multi-million dollar punitive dam- ance. Some, but by no means all, of these
Canadian observers were similarly perplexed ages against insurers is strictly a North provinces/territories have legislative provi-
how a simple water leak claim on a home- American phenomenon. There is no such sions prohibiting “unfair or deceptive prac-
owner’s policy spiralled into a “toxic mold” cause of action in the United Kingdom, the tices” in the business of insurance, but none
catastrophe and ultimately resulted in a very place where today’s modern insurance of the legislation provides any statutory
Texas jury tagging the homeowner insurer industry originated. cause of action for insurer “bad faith.”
with some $26 million for mental anguish In the USA, the Restatement of However, the Canadian courts have re-
and punitive damages, and attorneys fees Contracts expressly imposes upon contract- peatedly endorsed the concept of a duty of
(the Ballard v. Fire Insurance Exchange saga). ing parties “a duty of good faith and fair good faith as an implied term in every con-
For their part, US observers would dealing in [the contracts] performance and tract of insurance. The courts have also held
probably be surprised to learn that the high- enforcement.” No such provision exists in that, generally speaking, insurance policies

2. USLAW www.uslaw.org FALL/WINTER 2012
are “peace of mind” contracts. These prin- its. Rather, liability on that account will only E. PUNITIVE DAMAGES: WHAT IS THE
ciples can form the basis in appropriate flow where the defense is mishandled, THRESHOLD?
cases for both punitive and mental distress where the insurer fails to consider the in- While the case law establishes that the in-
damages arising from wrongful denials of sured’s interests as well as its own, and surer’s breach of the implied duty of good
coverage. where there has been poor or untimely faith claims handling is a necessary pre-con-
Thus far in Canada, only one appeal communication to the insured of all mate- dition for any award of punitive damages, it
court in one province (New Brunswick) has rial information touching upon their posi- does not follow that such awards are auto-
actually endorsed the concept that insurer tion in the litigation. matic in all cases where there has been a
bad faith is a tort (as opposed to merely a Cases involving failure to settle within breach. Rather, the Supreme Court of
breach of contract claim). In that case, the limits do not usually result in punitive dam- Canada has made it very clear there is a two-
court declared “it is settled law, at least in age awards. Rather, the insurer becomes li- step analysis which must be undertaken
this Province, that insurers owe a duty of able for the amount of the excess judgment. namely:
good faith and fair dealing to their insured, Indeed, the highest punitive damage award 1. Beyond establishing that the denial of
a breach of which may give rise to their lia- in Canada for wrongful denial of liability coverage was an incorrect judgment
bility in both contract and tort.” Opening coverage was made in 2012 and was only for call, was the denial also the result of
the door to tort allows damages claims to be $75,000. both overwhelmingly inadequate claim
made not only against the insurance corpo- handling or the introduction of im-
ration, but also directly against its adjusters, D. FIRST PARTY COVERAGE: WHAT proper considerations? and
claims managers, investigators and other in- ARE THE GOOD FAITH OBLIGATIONS? 2. If so, was the insurer’s conduct so ex-
dividuals involved in the claims process. By far the most common form of bad ceptionally egregious that an award of
However, such tort suits have not in fact faith allegation against insurers is made in punitive damages is warranted.
gained traction in Canada, and bad faith the context of first party property or disabil-
claims are still generally treated as breach ity insurance coverages. Even so, the It is only in exceptional cases where
of contract claims against the insurer alone. Supreme Court of Canada has declared; “an both conditions are met, that punitive dam-
Today, as in the USA, coverage enforce- insurer will not necessarily be in breach of ages are supposed to be awarded in Canada.
ment lawsuits in Canada invariably include the duty of good faith by incorrectly deny- Some observers believe the trial courts often
what have become almost standard form al- ing a claim that is eventually conceded, or overlook the exceptional nature of the
legations of bad faith claims handling on the judicially determined, to be legitimate…the award and that some dilution of the thresh-
part of insurers and very often claim substan- question instead is whether the denial is as old criteria has occurred. Still, awards of
tial punitive and mental distress damages on a result of the overwhelmingly inadequate punitive damage for insurer bad faith in
that account. Such awards are actually very handling of the claim or the introduction Canada remain relatively rare even where
rare and, in most instances, the claim is of improper considerations into the claims the denial of coverage or the handling of the
merely a litigation tactic designed to ransom process.” claim has been judicially found wanting.
settlements through a combination of: Conduct which some Canadian courts Given the size of awards regularly made in
1. the mere possibility of an award being have held to constitute a breach of the duty US courts, observers south of the border may
made by a sympathetic, unsophisti- of good faith in first party cases includes: be inclined to think bad faith litigation in
cated jury; and • Failing to provide an accurate and fair Canada is indeed much ado about nothing.
2. the increased cost, inconvenience and, explanation of the policy terms and
occasionally, embarrassments arising claims procedures;
from extensive discovery into corpo- • Failing to act with reasonable prompt-
rate finances, administration and ness during each step of the claims Nigel Kent (npk@cwilson.
claims handling. process, including timely payment of com) and Samantha Ip
undisputed portions of the claim. (ssi@cwilson.com) are sen-
C. THIRD PARTY LIABILITY CLAIMS: • Failing to undertake a competent in- ior partners in the insur-
WHAT ARE THE “GOOD FAITH” vestigation of the claim using objective ance litigation group at
OBLIGATIONS? unbiased experts; and Clark Wilson LLP in
As indicated, there have been relatively • Denials of coverage or delayed pay- Vancouver, Canada.
few successful bad faith lawsuits against lia- ments to take advantage of the in- Nigel's been practicing in-
bility insurers in Canada. Of course, like sureds economic vulnerability or to surance law for 32 years,
most litigation, the vast majority of such gain bargaining leverage. teaches at Capilano
cases settle before trial. Nevertheless, the ab- University, and is recog-
sence of reported Canadian case law in this The highest punitive damage award in nized as a most frequently
area provides an astonishing comparison a first party coverage case in Canada is $1 recommended specialist in
with the US experience. million. It involved a denial of coverage his field in the "Best
Canadian courts have held that while under a homeowners policy on grounds of Lawyers in Canada" direc-
the opportunity to settle a defensible case alleged arson even though the insurer was tory. In addition to her ex-
for the policy limits necessarily produces a told by their own investigators, they “didn’t pertise in insurance law,
conflict of interest between insurer and in- have a leg to stand on.” The award was Sam is also a leading construction litigation
sured, it is not a situation where the insurer made by a jury and while the Supreme counsel and is a much sought after contributor
owes fiduciary duties to the insured, and the Court of Canada ultimately allowed it to to industry publications and presenter at
insurer is not required to abandon their stand, they expressed the view that the prominent professional liability continuing ed-
separate interest simply because of the pos- amount was extremely high. ucation seminars.More detailed bios are avail-
sibility of a judgment in excess of policy lim- able at www.cwilson.com