WHITEN V. PILOT: End of a Saga

The care taken with the judgment made by the Supreme Court of Canada in the Whiten v. Pilot Insurance Co. is a great testament to the superb legal arguments of both sets of appeal counsel — Gary Will and Anil Varma for the Whiten family and Earl Cherniak, Q.C., and Kirk Stevens for the Pilot Insurance Company.

Regardless of the outcome, this case will undoubtedly go down in Canadian judicial history as one of the most ably argued and prepared insurance appeals of all time. The reason is that the Whiten case goes beyond a mere affirmation of the dissenting judgment from the Ontario Court of Appeal, and clearly suggests that in the future, the “duty of good faith” may be defined in part by an insurer’s marketing representations and the expectations of the policyholder.

Circumstances of loss

The facts of the case have been so widely repeated that most claims examiners can recite them by heart. While many of the participants in the trial still have mixed feelings about the verdict, the Supreme Court of Canada provided the following synopsis of the facts as they were agreed to by the parties to the appeals.

The Whitens discovered a fire in their house just after midnight in January 1994. The family fled wearing only their night clothes. The husband gave his slippers to his daughter to go for help and suffered serious frostbite. The fire destroyed the home and contents, including the family pets. Pilot made a single payment for living expenses, covered their rent for a couple of months, then unilaterally cut the family off.

The denial of the claim led to a lengthy trial based on the theory that the family had set fire to its own home, although the local fire chief, and their own expert investigators all said there was no evidence of arson. The insurer’s position was discredited at trial and on appeal, its counsel conceded that there was “no air of reality” to the allegation of arson. The jury awarded compensatory damages and $1 million in punitive damages.

The Ontario Court of Appeal allowed an appeal in part by Pilot, and reduced the punitive damages award to $100,000 stating that the jury’s award was “simply too high”. Justice Laskin wrote a very articulate dissent that while the award of $1 million was high, the jury’s decision was entitled to deference reinforced in this case by the trial judge’s endorsement of the award as “entirely reasonable”. Moreover, to be meaningful, an award of punitive damages “must sting”; it must not be perceived as a mere licence fee, or as a cost of doing business.

Supreme Court agrees

A majority of the Supreme Court of Canada agreed with Justice Laskin that the jury’s award of punitive damages, though high, was “within rational limits” and reinstated the million dollar award. The lone dissenting Justice, LeBel , believed that while the insurer’s bad faith in its handling of the claim “amply justified” awarding punitive damages, an award of $1 million — three times the compensation for loss of property — went well beyond a rational and appropriate use of this kind of remedy.

The Supreme Court of Canada had previously affirmed that punitive damages could be awarded in a breach of contract case, although it would only be in rare circumstances. In Vorvis v. Insurance Corporation of British Columbia, [(1989) 1 S.C.R. 1085], the court recognized that punitive damages require an “actionable wrong” in addition to the breach of contract. Besides the contractual obligation to pay the claim, an insurer is under a distinct and separate obligation to deal with its policyholders in good faith. A breach of the duty of good faith is accordingly “independent of” and “in addition” to any breach of the contractual duty to pay the loss.

The S.C.C. clearly took offence at the fact that the insurer’s conduct forced the Whitens to put their only remaining assets at risk while they fought their way towards court. After a detailed examination of the correspondence between the claims handlers and defence counsel, the Court concluded that the denial of the claim was designed to starve the plaintiffs into an unfair economic settlement.

Pilot argued that there was no evidence that this case represented a deliberate corporate strategy as opposed to an isolated, mishandled file that had ran amok. The Supreme Court acknowledged that this was true, but noted critically that the insurer had declined to call evidence to explain why this file went out of control, and what steps, if any, had been taken to prevent a recurrence.

Common law survey

In justifying its approach, the Supreme Court undertook a “comparative survey” of the experience in other common law jurisdictions which it identified as consistent with Canadian practice and precedent. Following an exhaustive review of the international case law, the Supreme Court of Canada articulated the following “universal” principles:

The court must rationally determine circumstances that warrant the addition of punishment to compensation in a civil action. As a rule, punitive damages will largely be restricted to intentional torts, or breach of fiduciary duty.

The general objectives of punitive damages are punishment (retribution), deterrence of the wrongdoer and denunciation — “the means by which the jury or judge expresses its outrage at the egregious conduct”.

The primary vehicle of punishment is the criminal law (and regulatory offences) and punitive damages should be resorted to only in exceptional cases and with restraint.

The requirement that there must be “high-handed”, “oppressive” or “vindictive” conduct provides insufficient guidance to the judge or jury setting the amount. A more principled approach is desirable.

The Court must strive to maintain rationality. In directing itself to the punitive damages, it should relate the facts of the case to the underlying objectives of punitive damages and ask itself what is the lowest award that would serve the purpose (i.e., because a higher award would be irrational.).

It is rational to use punitive damages to relieve a wrongdoer of its profit where compensatory damages would amount to nothing more than a licence fee to earn greater profits by disregarding the legal or equitable rights of others. In other words, insurers must not be allowed to simply include the potential for punitive damages as part of their reserves.

None of the common law jurisdictions has adopted (except by statute) a formulaic approach, such as a fixed cap or fixed ratio between compensatory and punitive damages. The proper focus is not on the plaintiff’s loss but on the defendant’s misconduct. This is a clear reference to the “treble recovery” statutes of some American states.

The governing rule for quantum is proportionality. The overall award, (compensatory damages + punitive damages + any other punishment related to the same misconduct), should be rationally related to retribution, deterrence and denunciation. The Court noted that there is broad support for the “if, but only if” test: the idea that punitive damages should be awarded “if but only if” the compensatory award plus costs are insufficient.

Juries need more guidance and help from the judges in terms of their mandate. The function of punitive damages should be explained in detail as well as the factors that govern both the award and the assessment of a proper amount. Juries should not be thrown into their assignment without any help and then be criticized for the result.

An appellate court is entitled to intervene if the award exceeds the outer boundaries of a rational and measured response to the facts of the case. In this instance the Supreme Court considered the million dollars to be at the high end of the scale, but not irrational.

Jury instructions

Traditionally, insurers have insisted on jury trials in fraud or arson cases, in the belief that a representative section of the public will adopt their view of a suspicious claim. Given the possibility of a jury misinterpreting the law with regard to punitive damages, (particularly in light of American courtroom dramas and John Grisham novels), this may be a questionabl e strategy.

In the Whiten case, the insurer argued that the trial judge did not give the jury adequate guidance on how to assess punitive damages. The Supreme Court obviously had some empathy with this submission, recognizing that the judge’s charge on this point was “skeletal”. The Court stressed that the charge on punitive damages should not be given as an afterthought, but should be understood as an important source of control and discipline. The jurors should not be left to guess what their role and function is (in this instance, the jury had sent a note to the trial judge asking for additional instructions that was not adequately answered).

Corporate wealth

When determining what an “appropriate” amount to constitute deterrence would be, the Court appears to have had mixed emotions about whether or not it was appropriate for a jury to consider a defendant’s corporate wealth. Adopting language out of the drama series “Sopranos”, the court acknowledged that it takes “a large whack” to wake up a wealthy and powerful defendant to its responsibilities.

The plaintiff’s counsel in this case argued and the jury accepted that that the punitive damages award of $1 million represented less than one half of one percent of Pilot’s net worth. The Supreme Court considered this a factor, but of limited importance, and commented that the fact that this had been put to the jury was “unhelpful”. The Court did, however, articulate some rules about when an insurer’s financial assets would be relevant.

The Supreme Court stated, however, that a defendant’s financial power may be relevant if the defendant chooses to argue financial hardship, if it is directly relevant to the misconduct or where it may rationally be concluded that a lesser award against a moneyed defendant would fail to achieve deterrence. This suggests that the corporate resources of an insurer may continue to be put to juries, but only where it is relevant or rational to do so.

Advertising

Paragraph 129 of the Supreme Court decision on Whiten v. Pilot is essential reading. The Supreme Court of Canada clearly suggests that its own independent review of Pilot’s advertising and marketing materials was a factor in determining the duty of good faith owed to policy holders. The Court observed: Pilot holds itself out to the public as a sure guide to a “safe harbor”. In its advertising material, the insurer refers to itself as “your pilot” and makes such statements as “At Pilot Insurance Company, guiding people like you into safe harbors has been our mission for nearly 75 years”.

Insurance contracts, as Pilot’s self-description shows, are sold by the insurance industry and purchased by members of the public for peace of mind. The more devastating the loss, the more the insured may be at the financial mercy of the insurer, and the more difficult it may be to challenge a wrongful refusal to pay the claim. Deterrence is required. The obligation of good faith dealing means that the appellant’s peace of mind should have been Pilot’s objective, and her vulnerability ought not to have been aggravated as a negotiating tactic. It is this relationship of reliance and vulnerability that was outrageously exploited by Pilot in this case. The jury, it appears, decided a powerful message of retribution, deterrence and denunciation had to be sent to the respondent — and they sent it.

Nothing to fear

The insurance industry by and large has nothing to fear from the decision of the Supreme Court of Canada in Whiten v. Pilot Insurance. While the case confirms the availability of punitive damages in cases where either an insurer or insured have breached their duties of good faith, most claims handlers and defence counsel have always assumed this to be the case and behaved accordingly.

The jury in Whiten decided a powerful message of “denunciation, retribution and deterrence” had to be made. While the Supreme Court made it clear that they would not have awarded so large an amount, it was not “irrational” under the circumstances. This suggests that in the future it is highly unlikely, but not impossible, that an award of more than $1 million dollars would be made against an insurer.

While some claims handlers may smile skeptically at the concept that an insurance policy is intended to provide “peace of mind”, it is clear that in the eyes of the average juror, television, radio and print ads are considered to be a promise of service that the insurer will be expected to live up to.

The “Golden Rule” articulated by the Supreme Court is very simple to understand and follow. The insurer must compensate in a timely manner. It has the right, even the duty, to investigate claims, but must do so fairly and diligently. For his or her part, the insured must file his or her claims promptly and assess his or her losses as accurately as he or she can. No responsible claims professional would ever suggest that it ought to be any other way.

The writer would like to gratefully acknowledge the help, comments and assistance of Anil Varma and Elizabeth Cummins Seto in the preparation of this article.