Canadian courts 'balanced'

Canadian courts have taken a balanced approach to their ability to impose aggravated or punitive damages for insurers' improper claims handling, Prof Craig Brown, from Western University, Canada, told the NZILA conference.

The hallmark of insurance law was balancing insureds' legitimate interests with those of a financially viable industry.

He said Canadian courts had "got it pretty right" in striking a balance in imposing damages for mishandling claims. Punitive damages were awarded as a punishment and aggravated as compensation. Aggravated damages required proof of loss and could not be awarded without evidence.

Had the courts not been as "restrained", insurers may have hiked premiums to compensate. Prof Brown said anecdotal evidence showed insurers took the potential for punitive or aggravated damages into account when deciding whether to deny or delay claims but they were "not complaining".

The Canadian law was a "mirror image" of Lord Mansfield's Carter v Boehm decision 250 years ago, which redressed the imbalance because market conditions at the time meant underwriters were vulnerable to "being duped". Canada's rules were designed to redress insureds' vulnerability.

Insurers had to advise insureds of decisions taken and why; pay promptly; not take advantage of insureds; and not make them sign away future rights. But insurers could delay or deny claims for "genuine issues of fact or interpretation".

Most Canadian cases that were denied involved fraud, arson or exaggerated or feigned personal injuries. Prof Brown said adjusters were "a sceptical bunch" and "sometimes take things too far". An "old insurance professor" once told him insurers had only two departments ­– premium collection and claims denial.

Prof Brown said the 2002 decision of Canada's Supreme Court, its highest, in Whiten was not the norm and "it baffles me why the insurer was so intransigent".

The Whitens' home burnt down and Pilot Insurance alleged fraud, despite investigators finding no evidence. The insured had recently become unemployed and declared bankruptcy, which was a red flag for the insurer.

The insured and his wife both got frostbite fleeing from the fire and all their personal belongings and their pets were burnt. Two adjusters and an engineer said the fire was accidental. Despite that, the insurer stopped paying for temporary accommodation "and the couple was thrown out into the cold again".

A jury ordered $C1 million ($A996,672) in punitive damages. The appeal court reduced it to $C100,000 but the Supreme Court reinstated the $1 million payment.

Whiten established principles that punitive damages were reserved for "malicious, high-handed or arbitrary behaviour". It opened the door for plaintiffs to seek punitive damages, but most were unsuccessful because "the behaviour was not bad enough", Prof Brown said.

In Clarfield v Crown Life, the court ordered $C200,000 in punitive damages and $C75,000 in aggravated damages because of the insurer's "informal policy to resist depression claims [from] high earners".

Mr Clarfield was a securities trader who suffered depression and claimed on his disability policy. A claims handler recommended payment, but was overruled by a supervisor. Aggravated damages were awarded because denial of cover forced Mr Clarfield to sell his house, which he had to buy back when he finally received his payout.

"The courts get very irritated with deliberate lack of good faith."

Prof Brown said Clarfield made insurer "bad faith" a separate wrong. The courts were "mixed" on whether that meant a bad faith claim could be pursued even if ultimately there was no cover contractually.

"Some say the doctrine of good faith arises from the day a claim is made, others suggest if there's no cover there's no doctrine. It's up in the air," Prof Brown said.

In the 2006 Fidler case, the Canadian Supreme Court said even without bad faith, if a claim was wrongfully denied or delayed, the insurer may be liable for aggravated damages.

"A contract promises peace of mind and denial of that attracts damages," Prof Brown said. Aggravated damages don't require a separate wrong of bad faith.

Prof Brown said he was concerned insurers could be liable for damages for delayed claims, but cases that dealt with the issue had required "some sort of wrongfulness, even if it's not bad faith, for example, a delay of five years".

The principles adopted for punitive or aggravated damages were they were the exception not the rule; and reserved for "malicious, high-handed or arbitrary behaviour". 

Despite the decisions in Whiten and Clarfield, the flood gates did not open for million dollar claims against insurers. While plaintiffs routinely sought punitive damages, in the past decade, amounts paid for aggravated or punitive damages ranged from about $C15,000 to $C30,000.

Courts considered whether there was intent; the need for deterrence – the penalty must be more than "just a slap on the wrist"; whether other criminal or administrative sanctions were imposed; and whether the insurer had obtained a benefit that punitive damages might reverse.