Punitive Damages

Study guide: Exam 6C

Punitive Damages (also exemplary damages) are awarded not to compensate the plaintiff but to punish and deter conduct that is malicious, oppressive, or a marked departure from ordinary standards of decent behaviour. In Canadian insurance they arise almost exclusively from an insurer's breach of the Duty of Good Faith in claims handling.

• The Canadian standard, from Whiten v. Pilot Insurance (SCC, 2002): punitive damages are exceptional, require an independent actionable wrong beyond the breach of contract (the breach of the duty of good faith supplies it in insurance cases), and must be rationally proportionate to the objective of retribution, deterrence and denunciation — no more than necessary to accomplish it.
• Quantum factors courts weigh: how reprehensible the conduct was, the vulnerability of the plaintiff, the harm caused or intended, whether the conduct was planned and deliberate, its duration, whether the defendant concealed it, the profit made from it, and the adequacy of other penalties already imposed.
• Canadian awards are modest by American standards and are subject to no fixed multiplier, but they are not trivial: the \$1 million in Whiten was on a claim of roughly \$345{,}000, and the Court expressly considered whether a lower award would simply be a cost of doing business.
• Not insurable, as a rule of policy — an insurer generally cannot insure a policyholder against their own punitive damages, since doing so would defeat the deterrent. Whether that holds in a given province and wording is a live coverage question and matters for liability reserving.
• For the insurer as defendant, punitive damages are the uncapped tail on Bad Faith Damages exposure. For the insurer as liability carrier, the question is whether the policy responds to punitive damages awarded against the insured at all, and treaties frequently address it separately.

Would Punitive Damages Be Awarded? Assess each scenario against the Whiten framework.

1. An insurer denies a claim on a coverage interpretation later held to be wrong, having obtained a legal opinion supporting its position.

2. An insurer instructs adjusters to offer no more than 60\% of assessed value on any claim where the claimant is unrepresented, on the basis that most will accept.

3. An insurer takes eleven months to decide a claim because of a backlog, then pays in full with interest.

Answer

1. No. Being wrong is not reprehensible. The insurer investigated, took advice, and formed a defensible view. This is a breach of contract remedied by paying the claim with interest — the Whiten threshold of a marked departure from decent standards is not approached.
2. Yes, and this is the strongest case of the three. The conduct is planned, deliberate, sustained, targets the vulnerable specifically because they are vulnerable, and is profitable — every quantum factor points the same way. The award would be sized to exceed the profit from the practice, which on a book-wide policy could be very large. It is also a natural Class Action.
3. Probably not, but it is not free. Delay from incompetence rather than strategy usually attracts interest and possibly aggravated damages for distress, not punishment. The analysis changes if the backlog was a deliberate cost-saving choice made knowing the effect on claimants — then it becomes case 2 with extra steps.

The organising question is always motive and system, not outcome: courts punish an insurer that chose to behave this way, not one that got the answer wrong.