When Luciano Branco was denied benefits from both his workers' compensation and long-term disability insurers in connection with an injury that left him permanently disabled, the legal battle that ensued stretched over a decade. In Branco v. American Home Assurance Co., (Branco), Justice Acton of the Saskatchewan Court of Queen's Bench awarded a combined total of C$4.5-million in punitive damages against the two defendant insurers. A combination of intentional bad faith conduct and a financially vulnerable insured led Justice Acton to set the new high-water mark for punitive damage awards against insurers in Canada.
Previous High-Water Mark
Since 2002, in assessing punitive damages against insurers, courts have followed the reasoning of the Supreme Court of Canada (SCC) in Whiten v. Pilot Insurance Co. (Whiten), where a high-water mark of C$1-million for punitive damages against insurers was set.
In his reasons, Justice Binnie defined a rational punitive damages award as being proportionate to the blameworthiness of the defendant's conduct, the vulnerability of the plaintiff, the harm or potential harm directed specifically at the plaintiff, the advantage wrongfully gained by the defendant, and the need for deterrence, all with a view to the other penalties assessed against the defendant on account of its misconduct.
Justice Binnie listed a number of factors to assist in determining the blameworthiness of a defendant's conduct, namely: (1) whether the defendant's misconduct was planned and deliberate; (2) the intent and motive of the defendant; (3) whether the defendant persisted in the outrageous conduct over a lengthy period of time; (4) whether the defendant concealed or attempted to cover up the misconduct; (5) the defendant's awareness that its conduct was wrong; (6) whether the defendant profited from the misconduct; and (7) whether the interest violated by the misconduct was known to be deeply personal to the plaintiff.
The SCC highlighted that a vulnerable insured, faced with a devastating loss, may be compelled to accept any amount offered by an insurer in order to receive some compensation for the loss. This power imbalance, he noted, when abused by an insurer sometimes requires courts to strongly deter such behaviour by making sizeable punitive damages awards.
Intentional Bad Faith Conduct Towards a Vulnerable Insured
In Branco, Justice Acton echoed the reasons of Justice Binnie, focusing on the blameworthiness of the insurer and the vulnerability of the insured in finding that the insurers had persistently conducted themselves in a bad faith manner. The behaviour in Branco supporting a finding of bad faith deserving of punitive damages included:
- cancelling benefits after not receiving an update from a doctor which had been appointed by the insurer;
- terminating benefits for non-compliance with programs that were completely unsuitable to the insured's age, skills, and previous earning potential, and were far out of commuting distance from the insured's home;
- making unreasonably low settlement offers, and improperly deducting legal costs incurred by the insurer from those offers;
- denying benefits for an egregiously long period of time, then finally providing a lump sum payment when the insured would have benefitted more from payments over time, as was the purpose of the insurance contract;
- engaging in the above conduct with knowledge that the insured's claims were covered;
- engaging in the above conduct with knowledge of the devastating effects it was having on the insured's well-being; and
- engaging in the above conduct for the purpose of exerting financial pressure on the insured in order to induce settlement.
Justice Acton found that the conduct of the insurers in Branco was made more egregious by the lengthy time period for which it continued. Justice Acton was further incensed by the fact that one of the insurers had been subject to a punitive damages ruling of the same court for similar conduct by the same insurance adjuster that had been dealing with Branco's claim.
The Court characterized the insurers' conduct as "aggressive non-activity" (para 215). Justice Acton awarded a total of C$4.5-million in punitive damages against the insurers, emphasizing the award's intended deterrent effect at para 216:
"It is hoped that this award will gain the attention of the insurance industry. The industry must recognize the destruction and devastation that their actions cause in failing to honour their contractual policy commitments to the individual insured."
It is worthy of note that a denial of coverage is not, in itself, sufficient to found a claim of bad faith to support an award for punitive damages. An insurer is entitled to dispute coverage of a claim, even in the event the claim eventually succeeds (702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd's London, England (2000), at para. 29, Fidler v. Sun Life Assurance Co. of Canada, at para. 71). In this respect, Branco has not altered the law. Although a finding of bad faith will depend on the circumstances of the case, an insurer who follows the best practices outlined below, among others, is unlikely to be found to have acted in bad faith:
- an insurer should be aware of the insured's potential economic vulnerability while awaiting the resolution of a large claim, and should take care that its actions cannot be construed as taking advantage of that vulnerability in order to negotiate a settlement;
- in denying coverage, an insurer should fully communicate its reasons for denial to the insured, basing its decision on a reasonable interpretation of its policy;
- in the event there is no reasonable basis upon which to deny coverage, an insurer should pay the insured's claim promptly and without unreasonable delay;
- offers for settlement, if they are to be made, should be made in good faith and for justifiable amounts in accordance with previous Canadian jurisprudence.
In circumstances where an insurer's conduct is found to be in bad faith, in order for punitive damages to be awarded, a court must find such conduct to be sufficiently high-handed, arbitrary, malicious or reprehensible to offend the court's sense of decency, and therefore worthy of punishment (Whiten, at para 94). Accordingly, not all cases of imperfect conduct will result in an award of punitive damages, particularly where the insurer's conduct cannot be characterized as having an improper purpose. As emphasized in Branco, vulnerability of the insured is also an important factor. Even in the event punitive damages are prima facie warranted, in the commercial context, the usual lack of vulnerability of the insured will militate against an award of punitive damages (Whiten, at para 115).
In our view, the award in Branco represents an anomaly and is unlikely to be duplicated or exceeded in the near future, particularly in the commercial context. Although the combined punitive damages award in Branco is 4.5 times higher than the previous C$1-million high-water mark set in Whiten, it is clear from Justice Acton's reasons that he was particularly incensed by the facts of the case.
Apart from setting a new punitive damages high-water mark, Branco has not changed the law with respect to the proper conduct of insurers. Insurers who are committed to upholding their duty of good faith to their insureds are unlikely to face a punitive damages award, whether approaching the high water mark or at all.
Finally, it should be noted that the trial decision in Branco may well be subject to consideration by the Saskatchewan Court of Appeal. In the meantime, a decision of the Saskatchewan Court of Queen's Bench is not binding elsewhere in Canada, and the SCC's decision in Whiten continues to be the authority on punitive damages awards against insurers in Canada.