Supreme Court Restores Record-Setting $1M Punitive Damages Award Against Home Insurer

Ogilvy Renault - Cabinet d'avocats | Supreme Court Restores Record-Setting $1M Punitive Damages Award Against Home Insurer

Insurance and Professional Liability Team
The Supreme Court of Canada has ruled that a punitive damages award of $1 million against an insurer, while high, was "within the rational limits" given the reprehensible character of its bad-faith denial of its policyholder's fire insurance claim. The ruling establishes a new high water mark for punitive damages in Canada, and underscores the importance for all insurers to deal with their insureds in good faith.

In a ruling[1] that sends a strong message to the entire Canadian insurance industry, the Supreme Court of Canada has restored the $1 million award for punitive damages assessed by a jury against a home insurer at the trial of a claim arising from a fire loss. The award is larger than any other ever made for punitive damages in Canada.

The case involved a claim by Daphne and Keith Whiten for recovery under their homeowner's insurance policy following the 1994 loss of their home to fire. Their insurer, Pilot Insurance, appointed an independent adjuster but chose to reject his advice to pay the claim. Despite the unanimous conclusion of investigating authorities that there was no evidence of arson, the insurer denied the claim on the basis that the fire had been deliberately set. It then formulated a defence strategy that the Court found was intended to "starve the insureds into submission."

At trial, the jury awarded the Whitens compensatory damages of $320,000 for their proven losses resulting from the fire. The jury also awarded three times that amount - $1 million - in punitive damages for the steadfast refusal of the insurer to abandon its ill-founded defence to the claim. The Whitens' entitlement to punitive damages was upheld by the majority of the Ontario Court of Appeal, but was reduced in amount to $100,000. The dissenting member of the Court of Appeal concluded that the original punitive damages award of $1 million ought to be upheld.

A central issue in the case concerned whether, in what is ultimately a claim based on breach of contract, punitive damages can be awarded at all. The Supreme Court of Canada had itself established[2] that where breach of contract is alleged there must be an "actionable wrong" independent of that breach in order for punitive damages to be recoverable. Writing for the majority, Justice Binnie ruled that a refusal by an insurance company to deal with its insured in good faith constitutes an independent breach that permits punitive damages to be awarded