In the recent decision of Stewart v. Lloyd’s Underwriters, 2022 BCCA 84, a three-judge panel of the British Columbia Court of Appeal grappled with these issues in an appeal of $100,000 in punitive damages awarded to Mr. Stewart, the insured, for the insurers’ breach of the duty of good faith.
Facts & Trial Decision
The Plaintiff, Mr. Stewart, suffered an accident while on vacation in Nevada in 2015. While drinking at a bar, he fell and hit his neck. He was hospitalized in Nevada for 12 days and was eventually flown to a hospital in British Columbia.
Prior to his vacation, Mr. Stewart purchased travel medical insurance with limits of coverage of $10 million (the “Policy“) from the respondent insurers. The healthcare bills from his hospitalization in the USA amounted to $293,127.60 USD. Of this, Health Insurance B.C. paid $3,574.63 USD and the insurers paid $15,500 USD to fly Mr. Stewart to a hospital in British Columbia, leaving a balance of $274,052.97 US.
In September 2015, the insurers denied coverage, taking the position that Mr. Stewart’s injuries resulted from alcohol intoxication. After the denial of coverage, the insurers advised the US health care providers that coverage had been denied.
On December 18, 2018, three and a half months prior to the trial, the insurers formally admitted coverage under the Policy, due in part to the opinion of a blood alcohol specialist obtained by the insurers in November 2018.
Once coverage was accepted, the insurers settled the outstanding health care bills for $56,429.81 USD (approximately 20% of the outstanding amount of $274,052.97 USD). Some of the discounts applied were “uninsured discounts”, and the insurers did not specifically tell the health care providers that Mr. Stewart was now insured.
At trial, Mr. Stewart claimed punitive damages and judgment for the difference between the amount of the bills and the actual amount paid, which he would then pay to the health care providers. He argued that the conduct of the insurers in settling the health care bills amounted to a breach of the duty of good faith, as they received unconscionable discounts on the false premise that the claim was not covered. Mr. Stewart argued that this placed him at legal risk, since he could not be released from his debt obligations to the health care providers when the insurers obtained “settlements” by concealing facts.
The Trial Judge found that, while the duty of good faith is owed to the insured and not to the third-party health care providers, the insurers’ duty of good faith to the insured included a duty to negotiate the health care bills in a manner that did not put Mr. Stewart at moral or legal risk. While the Trial Judge concluded that the insurers investigation of the claim did not reach the level of high-handed, malicious, arbitrary, or highly reprehensible misconduct required for a breach of the duty of good faith, the manner of settling the claims did reach this level. The Trial Judge found that the insurers breached their duty of good faith by failing to specifically advise the health care providers that their decision on coverage had been reversed. In coming to this conclusion, the Trial Judge also referred to the fact that the insurers received a substantial profit in settling the health care accounts for 20% of the full amount.
Regarding Mr. Stewart’s claim for his actual legal fees, the Trial Judge found that it was not reasonably in the contemplation of the parties at the time of contract that if coverage were disputed, Mr. Stewart would be able to recover his full legal fees. Further, the Trial Judge noted that there is no basis upon which to imply such a term: Mr. Stewart did not testify that this was within his contemplation at the time of the contract, there is no evidence of a custom in the insurance industry that this would occur, and there is no need to imply such a term to give business efficacy to the Policy.
Court of Appeal Decision
The Court of Appeal found that the Trial Judge erred in awarding punitive damages in these circumstances and overturned the $100,000 award.
Firstly, the Court of Appeal rejected the Trial Judge’s finding that the health care providers were not aware that coverage was now in place. Both the insurers and the health care providers were sophisticated parties experienced in dealing with the payment of healthcare accounts. As such, the Court of Appeal was not convinced that the healthcare providers, as sophisticated members of the industry, needed to be formally advised that the coverage decision had been reversed when they were later contacted by representatives of the insurers who were prepared to settle the bills.
Secondly, even if the Trial Judge’s findings were supported by the evidence, the Court of Appeal found that the insurers conduct did not justify an award of punitive damages in these circumstances. Importantly, the Trial Judge explicitly found that the insurers’ conduct towards Mr. Stewart was not malicious. Rather, it was the insurers’ conduct in settling the claims that formed the basis for the punitive damage award at trial.
The Court of Appeal found that there could be no breach of the duty of good faith, as there was no obligation on the insurers to consider Mr. Stewart’s motivations or sentiments in negotiating the settlement of the claims with the health care providers, when the claim was settled within the policy limits. In coming to this conclusion, the Court of Appeal noted the following:
- the insurers were entitled to resolve the health care providers’ claims directly under the terms of the Policy, and there was no term requiring that Mr. Stewart be involved in the negotiations with the health care providers;
- the insurers had no legal obligation to consult Mr. Stewart in the manner in which they did, so long as their conduct did not expose him to a claim in excess of the limits of the Policy;
- the decision to grant coverage was made well before the scheduled trial date and communicated to Mr. Stewart at that time;
- the known healthcare providers’ accounts were all settled before the trial date and within the policy limits; and
- there is no known jurisprudence where an award of punitive damages was made against an insurer for conduct which occurred after it accepted coverage.
The Court of Appeal addressed the Trial Judge’s statements on the perceived “profit” the insurers obtained through settling the claim for 20% of the full value. The Court expressed concern that, absent a systematic scheme of deception or other malicious conduct, considering the issue of profit could lead to improperly impugning the conduct of insurers in settling a claim for less than the policy limits on the basis of a perceived “profit”. This is particularly concerning because settling a claim for less than the policy limit is not necessarily synonymous with profit.
The Court confirmed there is no legal requirement that prevents a party in a commercial contract from being motivated by profit, and, so long as the claim falls within the policy limits, the insurer need only consider its own financial interests when determining whether and how to settle the claim.
Regarding Mr. Stewart’s claim for his legal costs, the Court of Appeal considered the principles underlying the costs regime in British Columbia and remedies for breach of contract, in particular for breach of the duty of good faith and fair dealing. Ultimately, the Court of Appeal concluded that Mr. Stewart could not recover his actual legal costs as compensatory damages, finding that damages for a breach of the duty of good faith should not be used to cure perceived deficiencies in the scheme of costs.
While the Court of Appeal accepted the principle that a breach of the duty of good faith may result in an award of damages which is distinct from the proceeds payable under the policy (such as mental distress damages), this does not, at this time, extend to a plaintiff’s legal fees. Historically, legal fees have not been awarded to plaintiffs on the basis of compensatory damages even where there is a breach of the duty of good faith. Further, even in “peace of mind” contracts, such as those for medical benefits or disability benefits, legal fees were still not awarded to plaintiffs, as no causal connection exists between the breach of the peace of mind contract and the resulting legal fees, unlike claims for mental distress, which are directly related to the peace of mind contract. Further, there was no evidence that anything different would have occurred to the benefit of Mr. Stewart. This was because coverage was ultimately provided to Mr. Stewart for the health care providers’ costs, which were satisfied by the insurers.
The Court of Appeal also identified a concern that, if a breach of the duty of good faith in an insurance policy context could result in a party’s actual legal expenses being awarded as consequential compensatory damages, then the question arises as to why this would not extend to other cases involving a breach of the general organizing principle of good faith in the law of contract generally.
This decision confirms for insurers that the duty of good faith does not require that an insurer agree with an insured’s view of the amount of the settlement. Once coverage has been confirmed, and if the claim(s) are well within the policy limits, then the insured’s personal views regarding the negotiation of the settlement are of no legal significance (absent a specific condition in the policy to the contrary).
Insurers should, however, be mindful that, while the $100,000 punitive damages award was set aside, the award of $10,000 in non-pecuniary damages to Mr. Stewart for mental distress was not disturbed on appeal. Insurers should remain mindful of the need for fulsome investigation prior to a decision on coverage, particularly when the insurance policy at issue is a “peace of mind” contract.
Finally, this decision confirms that, at least for the time being, the issue of recovery of costs will remain subject to the applicable costs regime and a plaintiff cannot recover their legal fees as compensatory damages.