Insurance contracts … 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.
– Whiten v Pilot Insurance Co., 2002 SCC 18 at para 129
Keith and Daphne Whiten met in England in the 1970s where they both worked as nurses. They relocated to Canada after their marriage. They bought a modest home in Haliburton County, Ontario in 1985. Keith started a locksmith business but it failed in 1993.
Both Whitens were unemployed in the early hours of January 18, 1994 when they discovered a fire in their house. They fled in their bedclothes, along with their young daughter, Louise, to the street outside in the -18C winter night. Keith froze the bottom of his feet – having given his footwear to his daughter so she could summon assistance – as they watched their home, three cats and everything they owned go up in flames.
… the jury ordered $1,000,000 in punitive damages against Pilot for breaching their duty of good faith to the Whitens.Their house insurer, Pilot Insurance Co., founded in 1927, provided property and automobile insurance exclusively in the Ontario market. It paid only $5,000 to the Whitens and covered a few months of rent on the cottage the family rented nearby while Pilot processed the Whitens’ claim.
The fire chief thought a malfunctioning kerosene heater caused the fire. An independent adjustor and Pilot’s own expert engineer found no evidence of arson. Nevertheless, Pilot denied the Whitens’ insurance claim.
Thus began the case that would rock the insurance industry in Canada for decades and set an enhanced standard for handling insurance claims.
Duty of Good Faith and Fair Dealing in Handling Insurance Claims
In Carter v Boehm (1766), English common law first recognized that an insurance contract is clothed in the duty of good faith (“uberrimae fidei”), including throughout the claims handling process. Claimants are bound to provide the insurer with all relevant information to assess the risk at hand. And insurers must process claims quickly, competently and fairly in communication with claimants.
In November 1995, the Whitens took their insurance company, Pilot, to an eight-week jury trial. The jury thought Pilot had denied the Whitens’ claim only because both were unemployed and experiencing financial challenges at the time of the fire. Even the Supreme Court of Canada later commented on how it was unlikely the Whitens could have profited from torching their own home. They held only $10,000 equity in their home and simply selling the home would have had the same financial benefit for them as collecting insurance proceeds. The Court said it “[defied] common sense to think they would have risked so much – including their daughter’s safety, all of their possessions and their cats – for so little”.
The jury found Pilot had acted in bad faith toward the Whitens. Bad faith is hard to fully define. According to the court in Macmillan Bloedel Ltd v Galiano Island Trust Committee:
[b]ad faith has been held to include dishonesty, fraud, bias, conflict of interest, discrimination, abuse of power, corruption, oppression, unfairness, and conduct that is unreasonable … [it has] also been held to include conduct based on an improper motive, or undertaken for an improper, indirect or ulterior purpose.
One knows bad faith when one sees it, and the jury saw it in the Whiten case. Pilot’s intentional and deceitful actions were designed to force a financially vulnerable family to settle for far less than what they were fairly entitled to.
… an insurance contract is clothed in the duty of good faith (“uberrimae fidei”), including throughout the claims handling process.As a result, the jury awarded the Whitens punitive damages against Pilot. Punitive damages in contract cases are exceptional. The court imposes them only if there has been highly reprehensible or arbitrary misconduct that departs to a marked degree from standards of decent behaviour. The court in Hill v Church of Scientology of Toronto described punitive damages as being for “malicious, oppressive and high-handed” misconduct that “offends the court’s sense of decency”. The amount of punitive damages is reasonably proportionate to factors such as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant.
The jury awarded the Whitens $318,252 in compensatory damages – the value of their house and contents – and their full legal bill of $317,659. The highest punitive damages award prior to this time was $50,000, but the jury ordered $1,000,000 in punitive damages against Pilot for breaching their duty of good faith to the Whitens.
In February 2002, the Supreme Court of Canada upheld this decision. Justice Binnie wrote:
The jury’s award of punitive damages, though high, was within rational limits. The respondent insurer’s conduct towards the appellant was exceptionally reprehensible. It forced her to put at risk her only remaining asset (the $345,000 insurance claim) plus $320,000 in costs that she did not have. The denial of the claim was designed to force her to make an unfair settlement for less than she was entitled to. The conduct was planned and deliberate and continued for over two years, while the financial situation of the appellant grew increasingly desperate. The jury believed that the respondent knew from the outset that its arson defence was contrived and unsustainable.
Purchasing insurance should mean buying peace of mind. The Whiten case underscored the insurer’s legal duty of good faith to be fair and timely in handling loss claims. On the other hand, insurance is a competitive industry. Many insurance claims have fraudulent elements, which insurers cannot afford to ignore. They must investigate and properly reject claims which evince an evidentiary basis for fraud.
When this unprecedented $1 million punitive damage award was announced, some people said this would “Americanize” the Canadian justice system because judges might too readily see bad faith, leading to punitive damages (and insurance premiums) spiraling out of control. This has not happened although Whiten remains the leading case on the insurer’s duty to act in good faith and on the determination of punitive damages.
Whatever Happened to These Parties?
A year after this case, in 2003, Pilot was purchased by General Accident, which changed its name to CGU and then later to Aviva Insurance of Canada.
After the Supreme Court of Canada’s decision, the Whitens bought the 19th-century home of their dreams. However, Keith Whiten passed away from cancer only seven months after the case ended. Some thought the extreme personal stress of the litigation exacerbated his condition. Shortly after, Daphne put the house on the market. Ironically, she could not find a company willing to sell her house insurance.