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Bogus Bad Faith Claim Proves Costly
Published in the April 2006 issue of Litigation Notes - View Article
Several years back, the decision in Pilot v. Whiten set a Canadian high water mark for punitive damages in lawsuits involving denial or restriction of insurance coverage and in other cases involving bad faith dealings by parties legally required to deal in good faith. The decision has had a significant impact on the way in which insurers have approached denial of coverage on loss claims. A recent decision in Ontario points to a possible rebalancing.
Pilot v. Whiten involved the Whiten family whose house was destroyed in a fire. With no evidence to support their allegations, Pilot Insurance Co. denied the claim based on assertions that the Whitens set the fire deliberately. The jury evidently concluded that Pilot advanced the arson defence in bad faith to apply pressure on a vulnerable plaintiff in order to force a discounted settlement on them. The jury awarded punitive damages of $1 million – a result that was eventually upheld in the Supreme Court of Canada.
Since Pilot v. Whiten, it has become routine for plaintiffs suing in respect of insurance coverage disputes to allege bad faith and advance large punitive damages claims. While the Supreme Court in its decision emphasized that the result in Pilot v. Whiten was appropriate only in exceptional circumstances as in that case, the spectre of punitive damages has become a powerful weapon for plaintiffs to force capitulation by insurers faced with spurious loss claims. Many insurers have been gun shy about maintaining a denial of coverage position in respect of questionable loss claims unless the evidentiary basis for challenging the claim is close to unassailable. However, the recent Ontario Superior Court decision in DiBattista v. Wawanesa Mutual Insurance Co. may level the field a bit by making plaintiffs think twice about alleging bad faith in cases where such an allegation is not warranted by the facts.
In DiBattista v. Wawanesa, the plaintiffs were a married couple who, along with their children, claimed substantial damages for personal injuries resulting from what they say was incomplete and negligent restoration work on their home following a fire. The defendants were Wawanesa Mutual Insurance Co. and Servicemaster, a restoration company. In addition to damages in negligence, the plaintiffs’ claim against Wawanesa sought punitive and aggravated damages. The Plaintiffs asserted that Wawanesa had conducted itself in a manner so high-handed, malicious, arbitrary or highly reprehensible that it departed in a marked degree from ordinary standards of decent behaviour – wording adopted from the decision of the Supreme Court in Pilot v. Whiten. After a seventy-day trial, the jury found that none of the defendants were liable to any degree and assessed the plaintiffs’ damages at zero.
The successful defendants were entitled to their costs of the defence. Costs are awarded on a partial indemnity basis absent some exceptional circumstances. The defendants asked that their costs be payable on a substantial indemnity basis. The defendants, who were separately represented, submitted bills of costs totalling a little over $1 million on a substantial indemnity basis. The plaintiffs responded that substantial indemnity costs should not be awarded because they could not have expected that costs could run so high. The trial judge rejected this response. He noted that the plaintiffs had alleged that Wawanesa in particular had been dishonest, but then wholly failed to substantiate this allegation. The plaintiffs had made these allegations not only in the context of the litigation but had also disseminated them through television and print media. The judge awarded substantial indemnity costs in the amounts sought without any reduction. The court was not deterred by the fact that such a large cost award would be financially devastating to an ordinary family.
The message for plaintiffs and their counsel is clear. Advancing bad faith claims as a matter of course is a risky tactic absent a credible evidentiary basis.
DiBattista v Wawanesa Mutual Insurance Company, 2005 CanLII 41985