Punitive damage claims: AN ARGUMENT FOR COVERAGE

Just before Christmas, the Supreme Court of Canada heard argument in the case of Whiten v. Pilot. The original trial jury heard evidence that lead them to conclude that Pilot acted in bad faith against its insured Whiten and awarded punitive damages of $1 million against the insurance company. Insurers now await the result of the appeal, wondering what impact the proliferation of punitive damage cases may have on the industry and if the unprecedented size of the Whiten award is a sign of things to come.

Keith and Daphne Whiten discovered a fire in their house as they were going to bed and escaped in their nightclothes in -18oC weather. The dwelling and all their belongings were destroyed and their three cats died in the fire. Pilot Insurance Co. ignored the recommendation of their independent adjuster to pay the claim and, despite conclusions of the fire chief at the scene and an engineer they hired to the contrary, took the position that the fire was incendiary and that the Whitens committed arson, disentitling them to coverage.

The Whitens rented a nearby cottage and Pilot paid the rent for a few months and then stopped without giving notice to the Whitens or the adjuster. The trial jury found that Pilot had acted reprehensibly throughout the handling of the claims file and awarded punitive damages. The amount awarded, $1 million, was the highest punitive damage against an insurance company in Canadian history.

Pilot appealed the decision. The Ontario Court of Appeal, with Justice Laskin dissenting, allowed the appeal in part by substituting the sum of $100,000 for the punitive damages award. The plaintiff appealed from that decision. At the Supreme Court of Canada, the Insurance Council of Canada (ICC), representing the majority of property and casualty insurers, intervened and was allowed to argue before the court.

High water mark

Insurers anxiously await the ruling, which may not be released until late spring or early summer. Many observers hope that the Supreme Court may use this case to set a high water mark for punitive damages in an insurance action. The court did something similar in a trilogy of cases in 1978 that still imposes a ceiling on non-pecuniary general damage awards of $100,000 in 1978 dollars (now adjusted for inflation to slightly over $250,000).

The reasoning of the majority of the Ontario Court of Appeal explores the history of punitive damage awards in Canada and appears to follow a rationale that such awards should be restricted to the most severe cases. They refer to breach of contract situations specifically suited to punitive damage awards, first party claims by an insured against an insurer, and breach of employment contract or wrongful dismissal situations. Some legal analysts speculate that the Supreme Court will provide guidance on which types of claims should properly attract punitive damages and which should not.

What is certain is that punitive damage claims are on the rise in Canada. While actual awards have been minimal, usually less than $25,000, punitive damages are sought in legal pleadings in virtually every insurance case and in many others.

Covering claims

What about the rise in punitive damage claims in other areas? It seems that there is a growing trend to seek punitive damages from a defendant in almost any situation where a contractual duty of care or intentional conduct is argued. Health care providers, lawyers, adjusters, and brokers routinely face substantial punitive damage claims when they are named in an action. Often the target defendant is an insurer but the “statement of claim” usually seeks punitive damages against all defendants.

Currently, few insurance policies respond to claims for punitive damages. The insured wants to be defended against all allegations. Not only do they dispute that a negligent error or omission was made, they vehemently dispute that they acted vindictively against the plaintiff. When the statement of claim is passed to the insurer, the insurer often issues a “reservation of rights letter”. The insurer will tell the insured that the allegations against them in negligence are covered by the policy and that the insurer will defend the claim. The allegations of intentional conduct seeking punitive damages, however, are not covered and there is no obligation on the part of the insurer to defend.

What does this do? Immediately the insured becomes concerned that the insurance policy does not provide him or her with adequate protection for this lawsuit. The insured wonders about the potential of a punitive damage award that not only might irreparably damage their reputation but cause financial ruin.

The natural fear of being involved as a defendant in a lawsuit is not allayed. The insurer, try as they may to dispel the insured’s fears, can not state that they are defending the punitive damages claim. What the insurer will say is that the allegations against the insured of negligent acts or omissions will be defended and unless this defence is unsuccessful, there would be minimal chance of a finding of punitive damages. This is cold comfort to a nervous insured who sees the six-figure damages claims under the heading of punitive damages.

The worst aspect of this harsh reality is that the insured wonders why his insurer is not fully supporting him. Can he trust the insurer? Can he trust the counsel appointed by the insurer?

Such nagging doubts do not help in the defence of the case. The insurer needs the full commitment, cooperation and trust of the insured to properly investigate and defend the covered allegations. Skillful plaintiffs’ counsel may attempt to capitalize on this wedge between the insurer and its insured by continually raising the specter of the punitive damages claim.

Defence costs coverage

What is the solution? Provide insurance coverage on all professional liability and CGL policies for defence costs for punitive damage claims. The defence agreement usually already stipulates that the policy will defend frivolous and vexatious claims and other claims without merit. Why should a punitive damage claim be an exception?

Insurers still may have to issue reservation of rights letters to the insured cautioning them that any award of punitive damages would not be covered under their policy but they will, with the assistance of the insured, vigorously defend punitive and other damage claims. In practice, insurers usually cannot and will not segregate or allocate defence costs between those incurred for the punitive damage defence and those costs incurred for covered claim defences. To attempt to do so seems very arbitrary. To defend a claim in negligence you deny that the insured was negligent and attempt to prove that is the case. If the insured was not at least negligent, how can the conduct complained of be vindictive, willful or malicious to be worthy of attracting punitive damages?

If the defence is going to be picked up anyway, why not provide for it specifically in the policy? Insureds may even be willing to pay a small additional premium for this added protection and peace of mind.