Whiten v Pilot Insurance Co

The Supreme Court outlined the contractual duty of an insurer to deal with policyholders in good faith, the breach of which would make the insurer liable for punitive damages. Writing for the majority, Justice Binnie held that the defendant insurance company had breached its contractual duty through its high-handed and reprehensible treatment of the plaintiff insureds. Justice Binnie also restored the unprecedented $1 million jury award, which the a majority at the Ontario Court of Appeal had reduced to $100,000.

Justice Binnie accepted the standard for imposing punitive damages articulated in Hill v Church of Scientology of Toronto: "Punitive damages are awarded against a defendant in exceptional cases for 'malicious, oppressive and high-handed' misconduct that 'offends the court's sense of decency'..."[2] Binnie set out the following principles to guide trial judges in their charges to juries:

(1) Punitive damages are very much the exception rather than the rule, (2) imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour. (3) Where they are awarded, punitive damages should be assessed in an amount reasonably proportionate to such factors as the harm caused, the degree of the misconduct, the relative vulnerability of the plaintiff and any advantage or profit gained by the defendant, (4) having regard to any other fines or penalties suffered by the defendant for the misconduct in question. (5) Punitive damages are generally given only where the misconduct would otherwise be unpunished or where other penalties are or are likely to be inadequate to achieve the objectives of retribution, deterrence and denunciation. (6) Their purpose is not to compensate the plaintiff, but (7) to give a defendant his or her just desert (retribution), to deter the defendant and others from similar misconduct in the future (deterrence), and to mark the community's collective condemnation (denunciation) of what has happened. (8) Punitive damages are awarded only where compensatory damages, which to some extent are punitive, are insufficient to accomplish these objectives, and (9) they are given in an amount that is no greater than necessary to rationally accomplish their purpose. (10) While normally the state would be the recipient of any fine or penalty for misconduct, the plaintiff will keep punitive damages as a "windfall" in addition to compensatory damages. (11) Judges and juries in our system have usually found that moderate awards of punitive damages, which inevitably carry a stigma in the broader community, are generally sufficient.[3]

In dissent, Justice LeBel accepted the appropriateness of a punitive damage award but was critical of the award's magnitude and skeptical of the remedy's deterrence objective on the facts of the case: there was no evidence of endemic high-handed behaviour, either by the defendant insurer toward its policyholders, or in the Canadian insurance industry generally. In any event, he opined, regulatory and penal mechanisms would be more appropriate for any industry-wide concerns, than less predictable damage awards.[4]

Justice LeBel agreed generally with the majority's description of principles governing punitive damages and, in particular, the importance of rationality and proportionality in shaping any such award. However, the original jury award in this case failed the rationality test because of its sole purpose of punishing the insurer's bad faith. It also failed the proportionality test because of the gulf between the quantum of the award and the loss suffered by the plaintiffs.[5] The reduced award at the Court of Appeal, according to Lebel J., satisfied both of these tests, "impos[ing] significant punishment for the bad faith of Pilot without upsetting the proper balance between the compensatory and punitive functions of tort law."[6] This award was sufficient and "consistent with the nature and purpose of punitive damages in the law of torts".[7] The majority result, on the other hand, was inappropriate in the context of tort law:

Tort law fulfills diverse functions. While deterrence and denunciation both still play a role, since it broke away from criminal law in the Middle Ages, in its core function, tort law has been compensatory or corrective...The purpose of this part of our legal system remains to make good the loss suffered, no less, no more...The award of punitive damages in discussion here leads us far away from this principle. It tends to turn tort law upside down. It transmogrifies what should have remained an incident of a contracts case into the central issue of the dispute. The main purpose of the action becomes the search for punishment, not compensation.[8]