Insurance companies are required to act in good faith. They are not supposed to fight tooth and nail to deny reasonable claims.
If an insurance company does not act in good faith — if it behaves badly — a court can award punitive damages to the plaintiff. Punitive damages are also called exemplary damages. Punitive damages are not meant to compensate the plaintiff. Rather, the purpose of punitive damages is to punish and deter the wrongdoer. They are also meant to deter others from behaving the same way.
A leading case involving punitive damages against an insurance company that acted in bad faith is Whiten v. Pilot Insurance Co. In this case, the insurance company was ordered to pay $1 million in punitive damages. This was reduced to $100,000 by the Ontario Court of Appeal, but it remains one of Canada’s largest ever punitive damages awards.
In the Whiten case, Pilot Insurance was the provider of homeowner’s insurance to the plaintiffs. When the plaintiffs’ home burned down, Pilot alleged arson, even though various experts ruled the fire was accidental. Pilot maintained its untenable position throughout a four-week trial. The court found that Pilot had breached its duty of good faith. Its actions were so reprehensible as to warrant the large punitive damages award.
Although an extreme example, the Whiten case is a good illustration of how insurance companies are held responsible when they act badly. Insurance companies are not supposed to be overly adversarial. When they are, courts have shown time and again that they will award punitive damages.
This is not to say that punitive damage awards are common in Canada. First of all, more than 90 per cent of legal disputes are resolved before trial. Second, most insurance companies act reasonably and in good faith in the vast majority of cases.
Punitive damages are awarded only when an insurance company’s actions represent a significant departure from ordinary standards of decency. Fortunately, they are rarely needed to enforce good behaviour. But they serve as an important reminder, and warning, to insurance companies that might be tempted to deviate from those standards.