Punitive Damages and the “Runaway Jury”

Recent awards by Ontario juries have lead insurance lawyers to reconsider whether they wish to continue to insist on civil juries in cases where there is a dispute involving coverage. The origins of punitive damages can be traced to 13th century England and before that to the Vikings. The basis of this system was that under certain circumstances, a civil fine would be paid in compensation rather than the traditional “eye for an eye” of physical retribution.

Viking courts always faced the danger of unsuccessful litigants gathering their kinsmen and killing all the jurors. In time, however, it was recognized that punitive damages served the purpose of discouraging the excesses of powerful landowners. As in medieval times, punitive damages still straddle the line between civil law (compensation) and criminal law (punishment).

In the landmark case of Hill vs. Church of Scientology of Toronto, the Supreme Court of Canada set out the rules for punitive damages. They could be awarded only in exceptional cases for malicious, oppressive and high handed conduct that offended the court’s sense of decency.

The Mazza case

The recent award in the case of Mazza vs. Hamilton Township Farmer’s Mutual Fire Insurance Co. reflects the inherent dangers of leaving punitive damages to a jury. On July 16 of this year, following a seven and a half week trial in St. Catharines, Ontario, a jury awarded the plaintiff Frank Mazza and his tenant almost $2.5 million in punitive damages.

This was a considerably larger amount than the previous landmark award in Whiten v. Pilot Insurance Co. In Whiten, punitive damages of $1 million were upheld by the Supreme Court of Canada. The jury awarded Mazza $300,000 in general damages, $2 million in punitive damages and $1.5 million for business interruption. The tenant was awarded $500,000 in punitive damages in addition to their contents claim for $30,000.

While the media have not reported any particulars of the alleged misconduct on the part of the insurer, the allegations are that the plaintiff purchased a hillside property and two apartments with the intention of starting a mushroom farm. Subsequently, the property burned to the ground. The insurance company suspected arson and refused to pay the claim after an investigation. The physical evidence ultimately failed to substantiate arson and the insurer adopted an alternative argument that there was no coverage because the plaintiff had not yet begun the mushroom farming operation when the fire broke out. After the fire, Mazza apparently abandoned his planned mushroom farm in favor of a boarding stable for horses.

There were also allegations of a material misrepresentation on the “proof of loss”. The plaintiff’s solicitor, Alf Kwinter, argued that his client had merely “misunderstood” that the amount claimed should be the farm’s purchase price instead of its replacement value. There are other legal problems with the jury award. The most obvious error is the fact that the amounts awarded in compensatory damages were in excess of the policy limits, particularly with regard to the business interruption loss. It seems highly unlikely under these circumstances that the Mazza verdict will be upheld on appeal.

Judicial Reviews

The appropriate amount of an award of punitive damages is always left up to the jury to some extent. In the Hill decision, the Supreme Court of Canada recognized that the jury must be given some leeway to do its job.

In order for a jury award to be reversed, an award of punitive damages must be “so inordinately large as obviously to exceed the maximum limit of a reasonable range, within which the jury may properly operate”. According to the Supreme Court of Canada, putting these two notions together, the test is whether a reasonable jury, properly instructed would conclude that such a large award and no less, was rationally required to punish the defendant’s misconduct.

In Whiten, the Supreme Court of Canada directed that if the award of punitive damages (when added to the compensatory damages) produced a total that exceeded what was rationally required to punish the defendant, it should be reduced or set aside on appeal. On first blush, this would clearly seem to be the case in the Mazza verdict.

High end

In the Whiten case, the Supreme Court of Canada ruled that the more reprehensible the conduct, the higher the rational limits to the potential award. Where the insurer’s bad conduct persists over a lengthy period of time, a larger award may be justified. In the Mazza case, almost ten years passed after the fire.

At the same time, the Supreme Court of Canada had made it clear that the $1 million awarded in Whiten was the upper end of the range, although not beyond the realm of rationality. It is difficult to imagine the facts under which a larger verdict would be upheld.

The Courts have also struggled with the question of how large an award is appropriate to achieve deterrence. The Supreme Court of Canada agreed that it can take “a large whack” to wake up a wealthy defendant to its responsibilities. They acknowledged that in the U.S. punitive damages are often calculated on the basis of an insurance company’s net worth. In Canada, while this can be a factor, it is one of limited importance.

In the Mazza case, the award was clearly disproportionate to the size of the insurer. The Hamilton Township Farmers Mutual Fire Insurance Co. is one of Ontario’s most historic small companies. It was formed in 1898 by farmers in Hamilton Township, near Cobourg, Ontario, who could not afford fire insurance offered by existing companies. With premiums reported in the range of $14.5 million, the company is difficult to cast in the role of a heartless corporate giant deserving of a crippling award.

Jury instructions

Recognizing that juries have great power to award punitive damages, the Supreme Court of Canada has directed that trial judges must instruct them carefully on their responsibilities. The jury charge will undoubtedly be an issue in the Mazza appeal. The trial judge’s charge to the jury must convey an understanding that punitive damages are the exception to the rule. They can be imposed only if there has been “high handed, malicious, arbitrary, or highly reprehensible conduct” that departs from the ordinary standards of decent behavior.

Where punitive damages are awarded, they must be assessed in an amount reasonably proportionate to the harm caused, the degree of misconduct, the vulnerability of the plaintiff and any advantage or profit gained by the defendant. The Supreme Court of Canada instructed that the jury charge also acknowledge that punitive damages are awarded only where compensatory damages are insufficient and only in the amount necessary to accomplish their purpose. Most importantly, juries must be reminded that judges and juries in the Canadian legal system have usually found that “moderate awards” of punishment are sufficient.

Laplante decision

If properly instructed, it will be a very rare case where a jury comes back with an enormous award of punitive damages against an insurer. This point was driven home in the recent decision of the Ontario Court of Appeal in Ferme Grald Laplante & Fils Lte vs. Grenville Patron Mutual Fire Insurance Co. (leave to appeal to the Supreme Court of Canada denied). In this decision, the plaintiffs were the owners of a dairy farm insured under a fire insurance policy issued by the Grenville Patron Mutual. A fire broke out in a barn destroying contents, damaging silos, killing some livestock and forcing the relocation of the remaining herd. Aspects of the claim turned out to be contentious and an action was commenced.

At the time of the trial, the defendant had paid out over $1.17 million under the policy. The plaintiffs sought an additional $700,000. The jury awarded almost $500,000 in compensatory damages and an additional $750,000 in punitive damages. The Court of Appeal set aside the award of punitive damages and emphasized that in a contract case, the plaintiff must show more than simply a breach of the defend ant’s obligations under the contract. In order to found a claim for punitive damages the court reiterated that there must be an “independent actionable wrong”.

The failure to pay the full indemnity constituted a breach of contract, for which the plaintiff was fully compensated with damages, interests and costs. While it could be held liable for any consequential damages resulting from its breach of contract, the court went on to find that no reasonable jury, properly instructed, could have possibly concluded that the insurer’s conduct was so outrageous or extreme as to warrant punishment. The jury seemed to have simply equated the insurer’s denial of an ultimately successful claim with the type of misconduct that could found an award for punitive damages. There was little evidence beyond speculation to support the contention that the insurer abused its position or power or purposely set out to force the plaintiff into an unreasonable settlement. On the contrary, the Court of Appeal found that this was a “hard fought commercial dispute” between two sophisticated parties.

Mark Twain said, “We have a jury system which is superior to any in the world, its efficiency is only marred by the difficulty of finding twelve men… who don’t know anything and can’t read.” The problem faced by Canadian insurers appears to be the fact that jurors have been indoctrinated with John Grisham novels and American courtroom dramas. Under these circumstances, the insurance industry finds itself in the position of looking to the judiciary to protect their rights against runaway jury awards.