To answer this question, we must explore two things: firstly, how the Courts have interpreted the meaning and scope of the insurer’s duty, that is, “a duty to defend”, as set out in the Insurance Act and in the policy; secondly, we must review the manner in which many insurers have come to fulfill their so-called duty to defend.

BAD FAITH IN TORT

Section 3.3.1, of the standard automobile policy, provides in the simplest terms, that the insurer will provide a defence to its insured. The real question therefore is, what is meant by the phrase “provide a defence”?

To assist in that interpretation, I cite the words of the current Chief Justice of the Supreme Court of Canada, McLachlin J.A., (as she then was) in Fredrickson v. ICBC [(B.C.C.A.) [1986] BCJ No. 366], at page 9,

….”the duty to its insured is to use reasonable care to protect (the insured) from unnecessary loss, an important right which deserves protection”.

A similar comment may be found in a case of Dillon v. Guardian Insurance [[1983] I.L.R.1-1706 (Ont.S.C.)]; both “Dillon” and “Frederickson” were cases which involved judgments in excess of policy limits, and in Dillon, the Court said:

“The insurer did not use reasonable care for the protection of its insured and for that reason was guilty of bad faith.”

In both cases, an assignment of the insured’s rights in contract against the insurer made to the plaintiff, were upheld. Judgment in excess of the policy limits was granted against the insurer as well.

Perhaps an even clearer description of the duty to defend may be found in Pelkey et al v. Hudson Bay Insurance[(1982) 35 O.R. (2d) 97, at P15]. Here Mr. Justice Catzman stated, inter alia…

”It was reasoned that in every contract, including policies of insurance, there is an implied covenant of good faith and fair dealing, that neither party will do anything which will injure the right of the other to receive the benefit of the agreement.”

A few paragraphs beyond that, Justice Catzman cites rule 2(b), of the Professional Conduct Handbook (1978), published by The Law Society of Upper Canada:

“The lawyer should serve his client in a conscientious, diligent and efficient manner, and he should provide a quality of service at least equal to that which lawyers would generally expect of a competent lawyer in a like situation.”

HOW DID THE INSURANCE INDUSTRY GET TO WHERE THEY ARE TODAY?

In my view, there were two completely separate causes of the current state of affairs, that is, the way insurers have come to approach their duty to defend their insured.

The first, in my view, was Bill 164. This statute in effect guaranteed that unless an insured carried minimum limits of $200,000.00 there was virtually no chance that a tort judgement would exceed policy limits. This, not surprisingly, led the industry to question why it should continue to pay lawyers hourly rates as they had in the past, given the narrow scope of a tort lawsuit under Bill 164.

The second cause of the current state of affairs, was the take over of claims handling policies by number crunchers in an era of mergers, acquisitions and a quest for ever increasing profits by the insurance industry.

The claims department of any insurance company has always been the whipping boy, at least since I began practice in 1966, for any and every economic difficulty that arose for that company. It is difficult to recall the blame ever being laid at the feet of the marketing or underwriting departments, and surely never the executives who ran the company. In short, the problem always seemed to rest with the claims department, and the money they were spending, on lawyers and on claims generally.

Experienced claims people will confirm that when the number crunchers began reviewing claims handling, they took a rather unsophisticated and simplistic approach. They would audit closed files and generally pose the same question: Why did we spend $100,000.00, for example, to defend a case, including counsel fees and all disbursements, that was settled, or adjudicated to be worth less than that amount?

It mattered little to them that the original demand of plaintiff’s counsel was perhaps for $1,000,000.00, but rather only the expense. Somehow, a dollar spent on expense was not seen to be the same as a dollar saved on the indemnity side of the ledger.

Despite the fact that Bill 59 replaced Bill 164, and created a much larger tort exposure, the approach of the industry has not changed and, indeed, if anything, gotten worse.

It is often unwise to employ personal observations, but to put it simply, these are the things that drove me from the defence bar after so many years of practice:

1. Block fees – this is the practice whereby an insurer will grant a case to a lawyer, with a block fee established of anywhere between $10,000.00 and $15,000.00 regardless of how long the lawyer has to carry the case or how much time it takes to settle it. This, in my view, therefore encourages skimming on the part of counsel, and settlements that probably are to nobody’s advantage except the plaintiffs, hopefully.

2. Hourly rates that are paid to defence lawyers are now the same for a five or ten year lawyer as a thirty year lawyer. Obviously, the people who made these decisions are not stupid. They had to know their approach was not likely to induce the more senior counsel to continue to offer their services. They were quite prepared to abandon a quality legal defence and saw it, in my view, as the cost of doing business. In other words, the approach seems to be that although we may occasionally go over our limits because our counsel are not that strong, this expenditure is more than made up by the money saved by going on the “cheap” in the payment of the defence counsel.

3. Recently, I know of two insurers who have now mandated their lawyers to charge no more than between eight or ten hours, per day, at trial. By my calculations, this really means a maximum of three hours preparation after the trial day which is obviously inadequate.

4. Interference in the conduct of the lawsuit has become rampant. One need look no further than Legal Guard, which is an arm of CGU, which, in my view, is simply sent there to terrorize defence counsel. I can never remember the advice of counsel at various stages of proceedings being overridden by the insurer, as it is today, including the retention of experts, the launching of applications – especially third party applications, settlement values, etc., etc. Again, in my view, the insurers see this as simply the cost of doing business.

The question then arises, is there any potential consequence to the insurer of this course of action, namely, hiring lawyers as cheaply as possible to run what nobody would refer to as a quality defence? As we all know, most, if not all, of the law governing bad faith in this country, had its origins in the United States. It, therefore, is not surprising that I looked south of the border to determine whether there were any reported cases that dealt directly on this subject.

In Continental Insurance Company v. Bayless and Roberts Inc.[608 p.2d 281 (Alas. 1980)], at page 293, of that judgment, the Court said the following:

“It (the insurer) has more than a duty of care of an ordinary man unskilled in litigation; it must exercise more than mere good faith. It is a professional which advertises by all media of mass communication its skills in the investigation, settlement and litigation of liability cases. It asks the individual who is an amateur in these matters, but who would be deeply concerned over a case in which he is personally interested, to substitute its skill for his, its judgment for his judgment, and its conduct for his own acts. It then becomes chargeable with a greater duty – even as the brain surgeon must exercise greater knowledge, judgment and skill in a brain operation than would a general practitioner of medicine. It is not an extraordinary degree of care but the care that is required under these particular circumstances. It must use skill diligently and adequately to investigate a case, it must use skill in negotiation, it must select skilled trial counsel – not the lowest priced member of the bar – and that individual so selected by it may bind the insurer by derelictions.”

This case simply stands for the proposition that where an insurer, in an effort to save money, hires unskilled counsel who make a number of errors leading to a judgment in excess of limits, the insured may assign its rights to the plaintiff to collect the monies in excess of the judgment, even where no offer to settle within policy limits were ever made.

Obviously, it is a significant leap to go from where we are to the determination in Continental v. Bayless and Roberts. I leave it to all of you to consider that case in the appropriate circumstances.

BAD FAITH IN ACCIDENT BENEFITS CLAIMS (HOW FAR WILL THEY GO?)

Obviously, in accident benefits, the institutional “bad faith” appears to have been elevated to an art form. When I last spoke to an OTLA conference, in May of 2000, I said that as a defence counsel I thought that John Grisham had exaggerated somewhat in describing the claims handling procedures of the insurer in question, in his book “The Rainmaker”. It only look a month on the plaintiffs’ side to appreciate he did not exaggerate. Now, after six months of practicing at the plaintiffs’ bar, I am afraid that Mr. Grisham did not go far enough.

In the first place, it is apparent to everybody who practices in this area, that 90% of the adjusters they deal with have absolutely no experience. Nevertheless, these are the people who cut off their own insureds on the flimsiest piece of evidence. In a case which I am currently handling, the insurer paid my client to the time of a discotomy on his back. At that point, they requested the surgeon’s prediction for recuperation, which was the usual three to six months if all goes well. The insurer cut off IRBs at four months, feeling that they had “gone more than half way”. Within ten months of cutting him off, he underwent a fusion from L2-S1, with rods used for support. He has never been reinstated some five years after originally being cut off.

The reason I cite this example is to demonstrate that even where there is objective disability, the insurer essentially plays the same game as they do in “The Rainmaker” – deny, deny, deny – in the hope that the claimant will often either go away or settle for peanuts. Obviously, I have yet to see a chronic pain, or psychological overlay, case where this approach was not taken by most insurers.

Secondly, there is apparently a lawsuit which has been commenced against a large insurer, alleging that confidential communications, on accident benefits files, were written on post-it notes only to be removed when the file had to be produced.

Thirdly, the U.S. Congress is about to commence hearings following revelations made by “Dateline NBC” on July 25, 2000. It revealed that State Farm had been using a company called CMR (Comprehensive Medical Review) to do a paper review, primarily of accident benefits files.

An interview was held with a man named Newton who revealed he had worked in CMR’s Vancouver office. Newton, a journalism graduate, along with a paralegal, a former teacher, and a nurse, created “doctors’ opinions”. Newton said CMR provided them with a computer containing stock paragraphs and medical opinions, ultimately sent to State Farm to be used to defeat claims of their insureds.

CMR’s President, Bill Marvin, told NBC that CMR had written 27,000 reports for some of the leading insurance companies. One might ask – leading in what? He admitted non-medical people wrote the reports, but that they were always checked by doctors for accuracy, who then signed them. However, an unnamed source at CMR, told NBC that doctors barely read the reports before signing them and typically would complete thirty to fifty reports in an hour. The source also said that doctors sometimes did a diligent review, and amended the reports, but frequently those reports were changed without the doctor’s knowledge and then sent out to the insurer.

Mr. Marvin admitted that he changed reports, but claimed that he always ran the changes by the doctor in question. However, this was not confirmed by at least one of the doctors interviewed by NBC.

They went on to speak with a gentleman named Jim Mathis, a former Claims Superintendent at State Farm, who described this as a “company-wide program”. He then produced a page from the Claims Manual which stated that if adjusters wished to deny a claim, they should hire a paper review company who will support your position.

Mathis claimed to have been fired by State Farm because he would not go along with the system. He sued State Farm, alleging it conspired with CMR to defraud its policy holders. His lawsuit was ultimately dismissed for lack of evidence, but is under appeal. Nevertheless, I am sure you will be interested to know that Mathis’ superior, Deputy Regional Vice-President Ralph Householder, left State Farm to become Senior Vice-President of CMR.

So that you are not misled into believing all cases alleging misconduct have failed, several are cited by NBC wherein Judges have accepted this evidence of bad faith, and in one case awarded $10,000,000.00 for punitive damages.

HOW TO MAXIMIZE RECOVERY

I have been asked to include some comments in this area and will do the best I can. In tort, where reasonable, make a formal offer within limits. Obviously, the law is clear that if the judgment goes over limits the insurer will be responsible following an assignment to the plaintiff.

As noted earlier in this paper, however, where there is demonstrable negligence in the conduct of the lawsuit by defence counsel, and the claim goes over limits, there is potential for argument that even without an offer within limits, that the insurer is liable for the complete amount of the judgment.

In accident benefits cases we are often caught between a rock and a hard place. We know the insurer has acted in bad faith, but at some point before trial they make an offer which your client wishes to take to get some closure to his claim. Again, the insurer is doing the same thing, treating this as a cost of doing business. They certainly know that ultimately they will be hit with punitive damages occasionally. On the other hand, by taking the attitude of “deny, deny, deny”, on balance, they are undoubtedly coming out further ahead from a financial perspective.

Accordingly, we are rather forced, it would appear, to accept our clients’ instructions and accept the offer to settle which, obviously, will not include punitive damages. I certainly have been guilty of doing the same thing, even settling at trial for the amount offered, without insisting on punitives.

I have tried to consider a number of alternative potential ways to bring the conduct of the insurers home to roost:

A. Consider the possibility of accepting the offer made in writing, with the exception of punitive damages. The insurer will obviously take the position that it is not a proper settlement since they were attempting to settle the entire claim for the amount offered. On the other hand, it is probably worth the effort of bringing an application to a trial Judge to see whether or not the attitude of the Court is such as to encourage the insurer to carry on with their practices. This, of course, will only work once or twice.

B. While I have grave doubts that we will meet with any success on my first suggestion, the possibility always remains of lobbying the government to change the legislation, to allow a case to go forward on punitive damages in those circumstances.

C. Perhaps the most appealing procedure would be for OTLA to, quite openly, do a monitoring of a given insurer, through its members, on an annual basis. In this way, evidence could be gathered against company XYZ, over the course of a year by all members of OTLA, with the information pooled and possibly presenting us with sufficient evidence to bring a class action against that insurer.

I think publicity is critical in this type of endeavour. In my view, the very notion that an insurer is aware that they are under scrutiny by this organization, which could lead to a potential class action, may cause them to reform, at least somewhat, their behaviour. If not, we may well have an appropriate class action.

Finally, as an appendix to this paper, I am attaching some other American cases with the principles they stand for and the various citations.