Bad faith claims against insurers and subsequent awards of punitive damages have become more common in Canadian case authority. However, the majority of the reported bad faith decisions involve an insurer’s denial of a first party claim and there are relatively few decisions dealing with bad faith and punitive damages for an insurer’s denial of coverage for defence of a third party claim. The recent decision of McDonald v. The Insurance Corporation of British Columbia, 2012 BCSC 283 is one such case.
The action arose out of a motor vehicle accident that occurred in the early morning hours of October 10, 2007. The Plaintiff, Eleanor McDonald had consumed some wine with a friends and then driven into Vancouver for sushi. Several hours later on her return trip she mistakenly took a wrong exit ramp onto highway 1 and was involved in a head on collision with a vehicle driven by Ms. To. The Plaintiff was arrested at the scene of the accident for refusal to provide a breath sample and impaired driving. She was also issued a ticket for driving without reasonable consideration. The criminal proceedings of the alcohol related charges (refusal to provide a breath sample and impaired driving) were stayed prior to the criminal trial proceeding. The Plaintiff eventually plead guilty to driving without reasonable consideration for others for which she received a $500 fine.
Ms. To launched a civil action against the Plaintiff, her mother as lessee of the vehicle and the leasing company, claiming damages for personal injuries arising from the collision (the “To action”). ICBC appointed counsel to act on behalf of the mother and the lessor although no counsel was appointed to represent the Plaintiff’s interests and nor did ICBC issue a statutory Third Party Notice to defend the claim pursuant to the provisions of the Insurance (Vehicle) Act.
Following the disposition of the criminal trial, the To Action was subsequently settled for $182,085.36. Some weeks after this settlement, ICBC concluded that at the time of the accident the Plaintiff was intoxicated rendering her incapable of exercising proper control of the vehicle and as a result she was deemed to be in breach of her insurance policy. In that regard, ICBC sought reimbursement from the Plaintiff of the settlement amount.
The Plaintiff brought an action against ICBC seeking a declaration that she was entitled to coverage for all claims arising from the accident as well as punitive damages alleging bad faith on the part of ICBC.
The Court ultimately held that at the time of the accident the Plaintiff’s ability to drive was not impaired by alcohol, going so far as to state that “the preponderance of evidence [was] overwhelmingly” against the Plaintiff being impaired.
After concluding that the insurance breach could not stand the Court turned its attention to the bad faith claim.
The Court noted that in most cases apart from the patently egregious circumstance, the assessment of whether the cumulative effect of a particular course of conduct ought to be catalogued as bad faith can be “difficult and nuanced.”
The Court ultimately found ICBC to have acted in bad faith in two respects:
1. In the conduct of their investigation; and,
2. In not keeping the Plaintiff appraised of the settlement negotiations.
With regards to the legal framework of bad faith the Court commented that:
[188] Bad faith is a term of convenience and does not carry a precise legal definition. Like many other judicial constructs, such as fairness and reasonableness, the notion of what will constitute bad faith is highly dependent on the factual context within which it is said to have arisen. It is therefore axiomatic that a bad faith claim must be evaluated in light of the surrounding circumstances on a case-by-case basis: a closed category of defining attributes is neither possible nor desirable. That said, judicial treatment of insurer bad faith has resulted in the development of useful principles that have served to shape the contours of its meaning.
In assessing whether ICBC had acted in bad faith the Court noted that the alcohol related criminal charges against the Plaintiff triggered a legitimate question about the Plaintiff’s entitlement to insurance coverage and as such ICBC’s initial “wait and see” course was not unreasonable in the circumstances however, the landscape shifted significantly with the unexpected pretrial stays of the alcohol related charges. At that point in time ICBC knew that they had to carry out a “credible investigation” in order to properly determine whether the breach could stand in the absence of a criminal conviction.
The Court held that ICBC placed “undue emphasis” on the observations and impressions of one of the attending police officers who believed the Plaintiff to have been impaired as this aligned with ICBC’s interest. However, the second attending officer’s report did not contain the view or opinion that the plaintiff was impaired or intoxicated at the time of the accident, or express any view on her capacity to drive or control a vehicle. ICBC did not follow up with this officer to discuss their impressions. The Court also held that ICBC had not assessed the police evidence with “an appropriate degree of critical scrutiny” and commented:
[249] An insurer does not have to have an iron-clad case in order to deny coverage. It is not expected to investigate a claim with the skill and forensic proficiency of a detective. Nor is it required to assess the collected information using the rigorous standards employed by a judge. The duty of good faith does not impose a standard of absolute liability in respect of an insurer’s wrong decision. The duty simply dictates that an insurer bring reasonable diligence, fairness, an appropriate level of skill, thoroughness and objectivity to the investigation, and the assessment of the collected information with respect to the coverage decision. My criticisms of the calibre of Ms. Baadsvik’s investigation and the shortcomings of her ultimate assessment should not be interpreted as suggesting that each individual omission or failing is, of itself, necessarily a violation of good faith and fair dealing. It is their cumulative effect that constitutes a breach of its duty of good faith.
In all, the Court held that ICBC’s investigation into the breach was deficient in that:
- ICBC relied upon one of the two attending Police Officer’s reports and disregarded the second report which was silent as to whether or not the Plaintiff was impaired;
- ICBC did not adequately investigate the fact that the Plaintiff had been pulled over at a checkstop in Vancouver 45-50 minutes before the accident and, at that time, the police did not suspect that she was impaired; and,
- Not interviewing one of the passengers in the Plaintiff’s vehicle or an independent witness to the accident.
As a result the Court held that ICBC did not perform a fair and proper evaluation or investigation of the breach.
With regards to the conduct of the defence the Court cited the decision of Shea v. Manitoba Public Insurance Co. [1991 CanLII 616 (BCSC)] as establishing “certain requirements are incidental to that good faith duty, such as acting with reasonable care, skill and diligence. Breaking it down further, the duty entails that the insurer inform the insured about settlement matters that could adversely affect the insured’s interests, and that it do so with reasonable promptitude.”
Here the Court held that notifying the Plaintiff, who they already suspected would be in breach of coverage, of the settlement only after it has been concluded was the equivalent of no notice at all and certainly did not amount to disclosure within a “reasonable promptitude” as contemplated in Shea.
The Court concluded that ICBC breached their good faith obligations towards the Plaintiff in their multiple failings with the investigation, assessment and breach decision and in its misconduct in relation to keeping her apprised of settlement negotiations in the To action. These respectively contravened the duty of fair dealings and good faith ICBC owed to the Plaintiff.
While not all findings of bad faith on the part of an insurer result in an award of punitive damages, the Court commented that this was an “exceptional case” as ICBC’s conduct was harsh, highhanded and oppressive and marked a significant departure from the Court’s sense of decency and fair play. While the nature of ICBC’s bad faith behaviour took different shapes throughout the timeline the overall handling and evaluation of the claim was overwhelmingly inadequate.
In awarding damages the Court determined that $75,000.00 was appropriately proportionate and rational to accomplish the objectives of punitive damages set out by the Supreme Court of Canada in Whiten v. Pilot Insurance 2002 SCC 18. The Court noted that the Plaintiff was in a vulnerable position and suffered harm as a result of ICBC’s misconduct and that an award of punitive damages was justified to deter other insurers from engaging in similar types of misconduct and to punish ICBC and condemn its breaches of duty.
This case marks one of the rare instances where punitive damages are awarded for breach of the duty of good faith with regards to third party claims. Usually the breach comes about as a result of an excess judgement over and above policy limits. In such circumstances the breach results in the insurer not being able to rely upon the policy limits and having to pay the excess judgment themselves. However, in this instance the award did not exceed the available third party limits and in fact ICBC had paid the entire amount of the settlement to the injured party.
This case is a good reminder that insurers must undertake a thorough and considered investigation and ultimate determination on whether or not there is coverage. Failure to do so can result in a breach of the duty of good faith and ultimately an award of punitive damages.
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