PAYING THE PIPER: Whiten, Punitive Damages, and
Bad Faith -- Whiten v. Pilot Insurance Co.
2002 S.C.C. 18- Insurers have a good faith
duty to their insureds. The duty includes the obligation to investigate
and settle covered claims, whether first party or third party, in
a manner which satisfies the good faith duty. Breaching that duty
may, in some cases, amount to a breach of the duty of good faith
giving the insured a claim for punitive damages in addition to the
amount owing under the policy for the insured loss.
$1 million is no longer too high an amount for a judge
or jury to award against an insurer for punitive damages for breach
of the duty of good faith towards its insured on a first party claim,
in the appropriate case. On the other hand, courts asked to award
punitive damages now must find, before punitive damages may be awarded,
even where the conduct of the insurer has been heinous, that the
amount that the insured has recovered under the policy, plus any
other fine or penalty that has been imposed on the insurer, is not sufficient punishment of the insurer. If it is sufficient, then
punitive damages are not available.
On February 22, 2002, the Supreme Court of Canada
restored the $1 million punitive damages judgment against Pilot
Insurance. That judgment had been given by an Ontario jury in 1996.
In 1999, the Ontario Court of Appeal upheld Pilot's liability to
pay punitive damages but reduced the amount to $100,000. The Supreme
Court reinstated the jury award by a 6-1 majority. It ruled that
$1 million, although on the high end of the scale was not, in the
circumstances, too high.
The Whiten's house had caught fire. The house and
contents were destroyed. All initial investigations showed the cause
was accidental and that there was no basis for denying the claim.
Despite this, Pilot refused to pay. Someone in Pilot's management
came to believe, for whatever reason and without any foundation
whatsoever, that the cause was arson by the insured's. Pilot set
out to prove the arson. It fired its first adjuster and expert.
It found another expert prepared to opine that arson was involved.
It used the threat of the arson defence in conjunction with the
insureds' desperate impecuniousness to try force - coerce -- the
insureds into settling for less than the amount of the loss. In
short, Pilot attempted to take advantage of its insureds so as to
pay less than it should have paid.
What Pilot did is detailed in this excerpt from the
Court of Appeal decision. The excerpt contains a list of everything
an insurer might do to invite a punitive damages award. It is also
a good guideline for what not to do. The Court of Appeal stated.
"In summary, the evidence overwhelmingly shows
that Pilot handled the Whitens' claim unfairly and in bad faith;
that it deliberately ignored any opinion, even of its own adjuster
and its own experts, that would oblige it to comply with its contractual
obligation to pay the claim; and, that it abused its financial position
and contrived an arson defence to avoid payment of the claim or,
at least, to force a significant compromise.
This evidence includes:
- Pilot deliberately ignored the opinion and recommendations
of Derek Francis, an experienced adjuster it retained to investigate
the fire loss.
- After receiving Francis' strong recommendation
to pay the claim, Pilot replaced him.
- Pilot never provided Francis' reports to the experts
that it later retained.
- Pilot asked the Insurance Crime Prevention Bureau
to investigate, but when the Bureau concluded that Pilot had no
defence to the claim, Pilot ignored the Bureau's conclusion.
- Pilot deliberately ignored the opinion of its engineering
expert Hugh Carter, who gave three reports that the fire was accidental;
and then Pilot refused to meet with Carter when he expressed concern
that his opinion was being misunderstood.
- Pilot admitted that the jury could reasonably infer
that Carter's later opinion reclassifying the fire as "suspicious,
possibly incendiary," was influenced by Pilot's counsel.
- Pilot pressured its experts to provide opinions
supporting an arson defence. Indeed, Pilot deliberately withheld
relevant information from its experts and, instead, provided them
with misleading information to obtain opinions favourable to its
- Pilot even admitted that the jury could reasonably
conclude the two later expert opinions supporting an arson defence
were influenced by Pilot's counsel.
- Pilot accepted as justified the trial judge's comment
that Pilot's counsel acted improperly in suggesting opinions to
experts whose livelihood was earned by providing services exclusively
to the insurance industry.
- Pilot used the bad faith claim against the Whitens
to refer to evidence of previous fires - evidence it now concedes
was irrelevant and inadmissible - in order to convince the Whitens'
counsel that a trial was risky.
- At every stage Pilot considered that it could safely
deny the claim because the Whitens would not refuse an offer in
the future. No representative of Pilot testified why the claim
was denied and therefore the jury could reasonably infer that
their testimony would not have shown that Pilot had a valid reason
for denying the claim.
- When the Whitens had lost everything in the fire
and when they were unemployed and on welfare, Pilot terminated
the rent payments on their rented cottage and did so without telling
The Supreme Court upheld the award by a 6-1 majority.
The dissenting judge though the $100,000 allowed by the Ontario
Court of Appeal was sufficient. The majority held that while the
award of $1 million in punitive damages was more than it would have
awarded, the amount was nonetheless within the high end of the range
where juries are free to make their assessment. It stated:
"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 Court also provided some clarification on when
punitive damages are available and what the jury should be told,
in cases where there is a jury trial.
The court held:
"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 charges 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 dessert (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 punishment, which
inevitably carry a stigma in the broader community, are generally
The issue of the sufficiency of the compensatory damages
is very important. It is now clear that that punitive damages may
be awarded, assuming the impugned conduct is sufficient to justify
the award, only where the amount of the for compensatory damages,
and any other penalties that might apply, are not sufficient to
achieve "the objectives of retribution, deterrence and denunciation."
This factor will require plaintiffs to lead appropriate evidence
to show that the total of the award - which will include the costs
that the insured recovers -- is not, in the circumstances
sufficient. It should be borne in mind that, in cases where the
insurer's conduct is sufficient for punitive damages cases, the
successful insured's trial costs will likely be award on a scale
which more fully indemnifies the insured for legal fees.
In addition, although increasing the top end of insurer's
exposure in the worst cases, the judgment may end up as a brake
on the amount of future awards and tend to eliminate or reduce punitive
damages awards exposure in minor cases. The court stated that punitive
damages are "very much the exception rather than the rule.
" There is the explicit statement by the majority that the
award was more than they would have allowed on top of the dissenting
judge's views that $100,000 was sufficient. And, the majority said
specifically that "Judges and juries in our system have usually
found that moderate awards of punishment, which inevitably carry
a stigma in the broader community, are generally sufficient."
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