COURT OF APPEAL FOR ONTARIO
DATE: 20000322
DOCKET: C28495
FINLAYSON, WEILER and O'CONNOR JJ.A.
B E T W E E N : )
) Paul Leamen and
702535 ONTARIO INC., and ) William Houston
702536 ONTARIO INC. ) for the appellants
)
Plaintiffs/ )
Appellants )
)
- and - ) Eric Williams
) for the respondent
EDWARD W. TINMOUTH in his Quality )
as Attorney in Canada for the )
Non-Marine Underwriters Members of )
LLOYD’S LONDON, ENGLAND )
(LLOYD’S OPEN MARKET) and )
CANASSURANCE GENERAL INSURANCE )
COMPANY INC. )
)
Defendants/ )
Respondent )
)
Heard: November 24, 1999
)
On appeal from the judgment of Mr. Justice Chadwick dated October
8, 1997.
O’CONNOR J.A.:
[1] This is an appeal from the judgment of Chadwick J. which was
delivered on October 8 and December 2, 1997 and on November 25,
- By that judgment, Chadwick J. dismissed the appellants’
claim for consequential and punitive damages against the
respondent insurer “Lloyd’s” for delaying for a period of over 18
months the payment to the appellants’ mortgagees of an amount
ultimately found to be owing under a policy of fire insurance.
[2] The appellants submit that the trial judge erred by failing
to find that the delay in payment constituted:
(a) a breach by Lloyd’s of its implied duty of good
faith to pay claims promptly; and
(b) a breach by Lloyd’s of condition 12 in s. 148 of
the Insurance Act, which provides that claims are
payable within 60 days of the completion of a proof of
loss.
[3] The appellants argue that they are entitled to be
compensated for the loss that they allege they suffered as a
result of the delay in payment. The damages that are
recoverable, the appellants contend, are distinct from the amount
paid under the policy to indemnify for the fire loss and are not
restricted by the policy limits. In addition, the appellants
argue that the trial judge erred in refusing to make an award of
punitive damages.
[4] For reasons set out below, I would dismiss the appeal.
Facts
[5] On April 30, 1997, the appellant 702535 Ontario Inc.
purchased the Eastview Hotel located at 200 Montreal Road in the
City of Vanier. The purchase price, which also included a nearby
parking lot, was $1.75 million. The appellant 702536 Ontario
Inc., a related company, leased and operated the hotel. By
December 1989, there were three mortgages registered against the
title of the properties in principal amounts totaling $1.665
million.
[6] Desmond Perkins and Dino DiMarino, as partners, indirectly
owned and operated the Eastview Hotel through the appellant
companies. Perkins ran the day-to-day operation and handled all
aspects of the insurance requirements.
[7] On December 4, 1989, the appellants were given 5 days notice
of the cancellation of their then existing fire insurance policy
because of rumors that the Eastview Hotel was to be burned. The
appellants’ insurance adviser, Barry Kerr, was able to replace
the cancelled policy with two policies which provided fire loss
coverage in the total amount of $1.75 million for the period from
December 9, 1989 to December 9, 1990 (“the original policies”).
These policies each contained a mortgage clause making losses
payable to the three mortgagees to the extent of their interests.
A portion of this coverage was underwritten by offshore companies
which were not licensed to carry on business in Canada. There was
a continuing concern with this situation. In May 1990, Kerr and
others met with Perkins and agreed to replace the original
policies with coverage underwritten by a licensed carrier.
[8] On June 20, 1990, Lloyd’s agreed to issue a policy insuring
the Eastview Hotel for fire loss in the amount of $1.75 million
for the period from June 8, 1990 to June 8, 1999. Losses under
this policy were also made payable to the three mortgagees. In
addition, the appellants obtained business loss coverage from
Canassurance General Insurance Company Inc. The appellants
asserted a claim in this action under the Canassurance policy.
However, that claim is not in issue on this appeal.
[9] The Eastview Hotel was damaged by two separate fires. The
first occurred on July 19, 1990 and the second on August 20,
[10] There was uncertainty among the various parties as to
whether the original policies were cancelled when Lloyd’s agreed
to provide coverage. A central issue in this litigation has been
whether Lloyd’s acted in good faith in taking the position that
the original policies remained in force at the time of the fires.
I will have more to say about this issue below.
[11] At the time that Lloyd’s agreed to issue its policy, it was
told that the building had fire and burglar alarms and ample
extinguishers. Lloyd’s required a protective safeguard
endorsement and an alarm system warranty. The issuance of the
Lloyd’s policy was subject to a satisfactory inspection report
being approved within a period of 45 days. An inspection was
carried out on July 10, 1990 and was approved by Lloyd’s on or
about July 19, 1990, the day of the first fire.
[12] When Lloyd’s approved the inspection report it was
apparently not aware that the City of Vanier had closed down the
Eastview Hotel as an unsafe building on July 16, 1990 due to a
lack of response to an order of an inspector that the fire alarm
system be replaced. The appellants obtained an ex parte order on
July 18 which stayed the unsafe building order and provided for a
hearing on July 23. In addition, Lloyd’s was also apparently not
aware that the first mortgage on the property was in default and
that the second and third mortgages, which were due by their
terms, had been extended on agreements to pay increased rates of
interest. The interest rates payable on the three mortgages were
11.5, 15 and 30 percent, respectively. On July 23, 1990, the
first mortgagee commenced power of sale proceedings.
[13] Shortly after the fires, the police commenced an
investigation. On January 23, 1991, Perkins and DiMarino were
charged with arson. The charge against DiMarino was withdrawn in
March 1991 and the charge against Perkins was dismissed at trial
on a motion for a directed verdict on July 19, 1992.
[14] During August 1990, the three mortgagees filed proofs of
loss with Lloyd’s claiming the amounts outstanding on the
mortgages together with accruing interest. On November 20, 1990,
the appellants filed a proof of loss with Lloyd’s and also with
the underwriters of the original policies claiming indemnity for
the fire damage to the building resulting from the two fires in
the amount of $1,068,881.07. In the covering letter enclosing
the proof of loss, counsel for the appellants stated that the
Lloyd’s policy was intended to replace the original policies, but
that his clients had not been advised of the cancellation of the
original policies before the loss occurred.
[15] Over time, the hotel building became a total loss. The
first mortgagee had the building demolished in December 1991 and
sold the land pursuant to its power of sale proceedings to the
City of Vanier on February 10, 1992 for $500,000.00. The sale
proceeds were applied to reduce the amount owing on the first
mortgage.
[16] Section 148(12) of the Insurance Act, R.S.O. 1990, c. I.8,
provides that a loss is payable within 60 days after completion
of the proof of loss unless the contract provides for a shorter
period. Lloyd’s did not pay the claim within the 60-day period.
On March 4, 1991, the first mortgagee commenced an action seeking
recovery from Lloyd’s under the Lloyd’s policy and also from the
underwriters of the original policies (“the original insurers”).
On April 25, 1991, the second and third mortgagees commenced a
similar action. On July 17, 1991, the appellants started an
action against both Lloyd’s and the original insurers seeking
recovery of the loss occasioned by the fires.
[17] In defence of the action brought by the mortgagees, Lloyd’s
pleaded that the policy was void ab initio because of
misrepresentation and/or the fraudulent omission to communicate.
Alternatively, Lloyd’s pleaded that the original policies also
covered the loss and that Lloyd’s should only be liable for its
ratable proportion of the loss.
[18] The mortgage clause in the Lloyd’s policy provided that the
policy would be in force, as to the interest of the mortgagees,
“notwithstanding any act, neglect, omission or misrepresentation
attributable to the mortgagor, owner, or occupant of the
property.” The mortgage clause also provided that if there was
other valid insurance with loss payable provisions to the
mortgagee, then that amount would be taken into account in
determining the amount payable to the mortgagees under the
Lloyd’s policy.
[19] The second and third mortgagees moved for summary judgment
in their action against Lloyd’s and the original insurers. The
motion was heard by Binks J. on March 10, 1992. By that time,
Lloyd’s had withdrawn its defence to the action based on the
claim of misrepresentation and fraudulent omission to
communicate.
[20] Prior to the motion, the original insurers filed an
affidavit which attached a statement from Mr. Kerr, the agent who
was involved in replacing the original policies with the Lloyd’s
policy. In this statement, Mr. Kerr stated that the original
policies had been cancelled in June 1990 when the Lloyd’s policy
was issued. According to Lloyd’s, this was the first time that
these facts had come to its attention.
[21] Binks J. dismissed the action against the original insurers,
and found that Lloyd’s was solely responsible for the loss. He
awarded judgment against Lloyd’s in an amount to be determined on
a reference to a Master in Ottawa. By reasons delivered February
19 and March 5, 1993, the Master determined that Lloyd’s was
responsible to indemnify for the total loss of the building. The
Master determined that the loss payable under their policy
amounted to $1,583,644.80 together with interest at the rate of
14 percent per annum. Lloyd’s was also ordered to pay the
mortgagees solicitor-client costs.
[22] By several payments, the first of which Lloyd’s made to the
first mortgagee in June 1992 and the balance of which were made
after the Master’s decision determining the amount owing under
the policy, Lloyd’s paid to the three mortgagees the full amount
of the principal and interest owing on the mortgages together
with their solicitor-client costs incurred in their actions
against Lloyd’s. These payments totalled $2,222,240.71. This
amount exceeded the limits of $1.75 million in the Lloyd’s
policy.
[23] In July 1993, the appellants amended their statement of
claim against Lloyd’s to make a claim for consequential and
punitive damages arising from the failure to pay the insured loss
to the mortgagees within 60 days from the filing by the
appellants of their proof of loss with Lloyd’s. It is this
amended claim that gives rise to the issues on this appeal.
[24] The trial judge found that the failure of Lloyd’s to pay the
claims immediately did not breach the insurance contract nor did
it constitute an act of bad faith. He therefore dismissed the
appellants’ claim for consequential and punitive damages. The
trial judge accepted the Master’s finding that the amount of the
loss occasioned by the fire was $1,583,644.80. In his reasons of
November 25, 1998, the trial judge set out the basis for the
appellants’ claim for consequential damages. However, as I read
those reasons, he made no finding as to the quantum, if any, of
consequential damages.
Analysis
[25] The appellants submit that Lloyd’s had a contractual
obligation to pay the insured loss of $1,578,644.80 in October
- There is no dispute that the payments to the three
mortgagees totalling $2,222,240.00 satisfied in full Lloyd’s
obligations under the insurance policy.
[26] The appellants submit, however, that the delay in paying the
insured loss to the mortgagees constituted a breach of contract
and as a result that Lloyd’s is obliged to compensate the
appellants for the loss, they argue, that they suffered resulting
from the delay in payment. They contend that the damages that
are recoverable for the breach of contract, are distinct from the
amount that was paid in performance of Lloyd’s obligation to
indemnify for the fire loss under the policy and are not
restricted by the limits in the policy.
a) The insurer’s duty of good faith
[27] The relationship between an insurer and an insured is
contractual in nature. The contract is one of utmost good
faith. In addition to the express provisions in the policy and
the statutorily mandated conditions, there is an implied
obligation in every insurance contract that the insurer will deal
with claims from its insured in good faith: Whiten v. Pilot
Insurance Co. (1999), 1999 CanLII 3051 (ON CA), 42 O.R. (3d) 641 (Ont. C.A.). The duty of
good faith requires an insurer to act both promptly and fairly
when investigating, assessing and attempting to resolve claims
made by its insureds.
[28] The first part of this duty speaks to the timeliness in
which a claim is processed by the insurer. Although an insurer
may be responsible to pay interest on a claim paid after delay,
delay in payment may nevertheless operate to the disadvantage of
an insured. The insured, having suffered a loss, will frequently
be under financial pressure to settle the claim as soon as
possible in order to redress the situation that underlies the
claim. The duty of good faith obliges the insurer to act with
reasonable promptness during each step of the claims process.
Included in this duty is the obligation to pay a claim in a
timely manner when there is no reasonable basis to contest
coverage or to withhold payment. Bullock v. Trafalgar Insurance
Co. of Canada, [1996] O.J. No. 2566 (Q.L.) (Gen. Div.); Labelle
v. Guardian Insurance Co. of Can. et al.(1989), 1989 CanLII 10448 (ON SC), 38 C.C.L.I. 274
(Ont. H.C.J.); Jauvin v. L’Ami Michel Automobile Canada Lt‰e et
al (1986), 1986 CanLII 2572 (ON SC), 57 O.R. (2d) 528 (H.C.J.).
[29] The duty of good faith also requires an insurer to deal with
its insured’s claim fairly. The duty to act fairly applies both
to the manner in which the insurer investigates and assesses the
claim and to the decision whether or not to pay the claim. In
making a decision whether to refuse payment of a claim from its
insured, an insurer must assess the merits of the claim in a
balanced and reasonable manner. It must not deny coverage or
delay payment in order to take advantage of the insured’s
economic vulnerability or to gain bargaining leverage in
negotiating a settlement. A decision by an insurer to refuse
payment should be based on a reasonable interpretation of its
obligations under the policy. This duty of fairness, however,
does not require that an insurer necessarily be correct in making
a decision to dispute its obligation to pay a claim. Mere denial
of a claim that ultimately succeeds is not, in itself, an act of
bad faith: Palmer v. Royal Insurance Co. of Canada (1995), 27
C.C.L.I. (2d) 249 (O.C.G.D.).
[30] What constitutes bad faith will depend on the circumstances
in each case. A court considering whether the duty has been
breached will look at the conduct of the insurer throughout the
claims process to determine whether in light of the
circumstances, as they then existed, the insurer acted fairly and
promptly in responding to the claim.
[31] A breach of the duty to act in good faith gives rise to a
separate cause of action from an action for the failure of an
insurer to compensate for loss covered by the policy. In Whiten
v. Pilot Insurance, Laskin J.A.1 made the point at p. 650:
[i]n every insurance contract an insurer has an implied
obligation to deal with the claims of its insureds in good
faith. [cites omitted] That obligation to act in good
faith is separate from the insurer’s obligation to
compensate its insured for a loss covered by the policy.
An action for dealing with an insurance claim in bad faith
is different from an action on the policy for damages for
the insured loss. In other words, breach of an insurer’s
obligation to act in good faith is a separate or independent
wrong from the wrong for which compensation is paid.
[32] 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 for the insured loss and which are not restricted by the
limits in the policy: See Bullock, supra; Labelle, supra.
b) Statutory Condition 12
[33] The appellants argue that in addition to the implied
obligation to pay a claim promptly, an insurer is obliged to pay
all proper claims within 60 days of the date on which it receives
a proof of loss from its insured. This obligation, the
appellants submit, flows from the Statutory Condition 12 set out
in s. 148 of the Insurance Act. Section 148(1), which applies to
fire insurance policies, provides that the conditions set out in
the section are deemed to be part of every fire insurance
contract in force in Ontario. Condition No. 12 reads as follows:
- The loss is payable within 60 days after completion of
the proof of loss unless the contract provides for a shorter
period.
[34] The appellants submit that the requirement in Condition 12
is absolute. They argue that if an insurer fails to pay a claim
within 60 days of receiving a proof of loss and the claim
ultimately succeeds, then the insurer will have breached this
condition and will be liable for any damages incurred by the
insured as a result of the failure to pay the claim within the 60-
day period.
[35] I do not accept this argument. In my view, it places too
broad an interpretation on the language and purpose of Condition
- The language in the condition provides that the claim “is
payable” within 60 days after completion of the proof of loss.
This language, it seems to me, is consistent with a narrower
interpretation than that urged by the appellants. The language
may be interpreted as establishing a reasonable period of time
within which an insurer may investigate and assess a claim and
after which an insured may bring an action in order to recover
the claim if it remains unpaid. If a court ultimately determines
that interest should be paid on an unpaid claim, the expiration
of the 60-day period is a reasonable starting point from which
interest should accrue: Granpac Ltd. v. American Home Assurance
Co. (1981), 1981 ABCA 285, 129 D.L.R. (3d) 704 (Alta. C.A.).
[36] This narrower interpretation of Condition 12 is consistent
with the scheme for payment of claims created by the statutory
conditions in s. 148 of the Insurance Act. Condition 11, for
example, provides for an appraisal process to resolve disputes
about the amount of a loss claim by an insured.2 The appraisal
process referred to in Condition 11 may only be invoked after the
proof of loss has been delivered to the insurer. Condition 11
also provides that the questions that are subject to the
appraisal process shall be determined before there can be
recovery under the insurance contract. The Insurance Act does
not establish a timeframe within which the appraisal process must
be completed, but it seems obvious that in some instances the
appraisal process could extend well beyond the 60-day period
referred to in Condition 12. Having provided for an appraisal
process which could extend beyond the 60-day period, it would be
inconsistent to impose an absolute obligation upon an insurer to
pay claims within the 60-day period, failing which the insurer
would be exposed to the payment of consequential damages
resulting from the delay in payment.
[37] Moreover, the broader interpretation urged by the appellants
could have far-reaching effects for the insurance industry. In
some cases, the risk of being found liable for consequential
damages resulting from unsuccessfully contesting a claim under a
policy would constitute a substantial disincentive for insurers
to deny claims, even those which they reasonably and in good
faith consider to be either unfounded or inflated. In a general
sense, insurers and insureds have a common interest in ensuring
that only meritorious claims are paid. Increased payments by
insurers lead to increased premiums for insureds. In order to
effectively screen claims, insurers must be free to contest those
claims which in good faith they have reason to challenge, without
running the risk that if they are ultimately found to be wrong,
they will be liable to indemnify the insured for losses not
underwritten in the policy contracted for by the insured.
[38] I am not aware of any authority interpreting Condition 12 or
similarly-worded statutory conditions in other provincial
legislation in the manner urged by the appellants. In my view,
if the Legislature had intended to create such a fundamental
change in the manner in which insurers respond to claims from
their insureds, it would have done so with clearer and more
direct language.
[39] I am satisfied that Condition 12 does not create the
obligation urged by the appellants. An insurer’s duty when it
receives a claim from its insured is found in the duty of good
faith, and it requires the insurer to respond in a prompt and
fair manner, nothing more.
c) Application to facts of this case
[40] The appellants argue that Lloyd’s breached its duty of good
faith by not paying in October 1990 the loss of $1,583,644.80,
which was the amount determined by the Master in February 1993 to
be owing under the policy.
[41] In August 1990, the three mortgagees filed proofs of loss
claiming the amounts owing under their mortgages but not
specifying any details of the fire loss for which the claims were
made. On November 20, 1990, the appellants provided Lloyd’s with
a proof of loss claiming $1,068.881.07 for the damage to the
building caused by the two fires.
[42] In March and April 1991, the mortgagees commenced actions
seeking to recover the loss occasioned by the fires from Lloyd’s
and also from the original insurers. In July 1991, the
appellants commenced an action seeking recovery of the insured
loss together with interest. That action also sought recovery
from both Lloyd’s and the original insurers. The appellants did
not, at that time, claim consequential or punitive damages
resulting from the failure to pay the insurance claim promptly.
[43] Lloyd’s raised two defences in response to the actions by
the mortgagees. They pleaded that the policy was void ab initio
because of misrepresentation and fraudulent omission to
communicate. They also pleaded that the original insurers were
co-insurers and that Lloyd’s should therefore only be liable for
its proportionate share of the fire loss.
[44] Section 1 of the mortgage clause in the Lloyd’s policy
provides that the policy would be in force as to the interests of
the mortgagees, notwithstanding any act, neglect, omission, or
misrepresentation attributable to the mortgagor, owner or
occupant of the property.3
[45] The effect of this clause was that the misrepresentations
and the fraudulent omission to communicate pleaded by Lloyd’s,
even if established, did not constitute defences to the actions
brought by the mortgagees. The Supreme Court of Canada has held
that similarly worded hypothecary (mortgage) clauses constitute a
contract between the hypothecary creditor (mortgagee) and the
insurer which is separate from the one from the contract between
the hypothecary debtor (mortgagor) and the insurer. That being
the case, the court held that the clear language of the
hypothecary clause precluded the insurer from relying upon acts
or omissions of the hypothecary debtor when defending an action
by the creditor. This was held to be the case even if those acts
included misrepresentations which were made at the inception of
the policy which it was argued rendered the policy void ab
initio: Caisse Populaire v. Vall‰e du Richelieu, [1990] 49
C.C.K.I. 23 (S.C.C.); National Bank of Greece (Canada) v.
Katsikonouris, 1990 CanLII 92 (SCC), [1990] 2 S.C.R. 1029.
[46] In view of Section 1 of the mortgage clause, Lloyd’s had no
basis for relying upon the alleged misrepresentation and failure
to communicate by the appellants as a reason for not paying the
insurance proceeds to the mortgagees. Indeed, by the time the
motion for summary judgment was heard by Binks J. on March 10,
1992, Lloyd’s had withdrawn this defence and was relying only on
the second defence, that the original policies were in force and
that the original insurers were therefore co-insurers and liable
to pay their proportionate share of the loss.
[47] On March 10, 1992, Binks J. rejected Lloyd’s defence,
dismissed the mortgagees’ actions against the original insurers
and granted summary judgment in favour of the mortgagees against
Lloyd’s. Binks J. found that Lloyd’s was solely responsible to
pay the insured loss to the mortgagees. Lloyd’s did not appeal.
It accepted its responsibility to pay the claim in full together
with interest. It is not argued that Lloyd’s acted in bad faith
based on the time that elapsed after the judgment of Binks J. to
the time when payments were made to the mortgagees.
[48] The question therefore comes down to whether Lloyd’s
breached its duty of good faith in refusing payment on the basis
that the original policies were in force at the time of the
fires. The trial judge dealt with this issue as follows:
Under the circumstances, taking into consideration the
nature of the fire, the confusion regarding the insurance
policies, the fire code violations and the litigation involving
the mortgagees, I do not find that Lloyd’s acted unreasonably.
As such I do not find they were in breach of the contract of
insurance and in addition I do not find that they have acted in
bad faith in relation to the plaintiffs’ claim, as such their
claim against the defendant Lloyd’s for punitive and
consequential damages is dismissed.
[49] The appellants argue that the original policies were
cancelled on June 8, 1990 and that Lloyd’s either knew or should
have known of the cancellation. They contend therefore that it
was unreasonable for Lloyd’s to rely on the existence of the
original policies in refusing to pay the appellant’s mortgagees
and that this refusal constituted a breach of the duty of good
faith.
[50] In support of their argument that Lloyd’s knew or should
have known of the cancellation of the original policies, the
appellants rely on the following: an acknowledgment by Robert
Monk, the adjuster for Lloyd’s, who testified on the examination
for discovery that he was told by Mr. Kerr that those policies
had been cancelled; the statement of defence of the original
insurers in the action brought by the mortgagees in which they
plead that the policies had been cancelled; and a letter from
Mr. Kerr dated October 5, 1990 to Mr. Perkins, the principal of
the appellants, advising that the original policies had been
cancelled as of June 8, 1990.
[51] There are, however, a number of circumstances that, in my
view, made it reasonable for Lloyd’s to take the position that
the original policies were still in effect at the time of the
fires. There was nothing in writing produced to Lloyd’s until
the motion before Binks J. on March 10, 1992 confirming that the
policies had been cancelled. Moreover, the appellants submitted
a proof of loss on November 20, 1990 in which they claimed
recovery from both Lloyd’s and the original insurers.
[52] In addition, the mortgagees, who were named as loss payees
under the original policies as well as in the Lloyd’s policy,
started and maintained their actions against both Lloyd’s and the
original insurers until the latter claim was dismissed by Binks
J. on March 10, 1992. The combined effect of s. 147(1) of the
Insurance Act4 and Condition 5 in s. 148 of the Insurance Act5is
that an insurance policy cannot be cancelled without written
notice being provided to a mortgagee who is named in the policy.
It would have made no sense for the mortgagees to have maintained
their actions against the original insurers if they had received
written notice of cancellation of those policies. There was no
evidence that the mortgagees received a copy of the letter of
October 5, 1990.
[53] The respondents only produced a copy of this letter to
Lloyd’s in July 1993, at around the same time that they amended
their claim to include the claim for consequential and punitive
damages based on the delay in payment.
[54] Finally, there were circumstances that might have caused
Lloyd’s to reasonably believe that the appellants may have
arranged to have more than one fire insurance policy in effect at
the time of the fires. Lloyd’s had not approved the inspection
of the building until on or about the date of the first fire. It
would have made sense for the appellants to continue the original
policies until that inspection was approved. After the fire,
Lloyd’s learned that on July 16, three days before the first
fire, the City of Vanier had ordered the building closed. The
police investigated the fires and laid arson charges in January
- The first mortgage was in default and the first mortgagee
instituted power of sale proceedings immediately after the first
fire. From Lloyd’s standpoint, this claim was not
straightforward. Although none of these events in themselves
constituted grounds for denying payment to the mortgagees, when
taken together, they provided a basis on which Lloyd’s might
reasonably conclude that the appellants had chosen not to cancel
the original policies and had decided to maintain double
coverage.
[55] I agree with the trial judge’s conclusion that Lloyd’s did
not breach its duty of good faith by taking the position that the
original policies were in effect at the time of the fires.
However, that position only entitled Lloyd’s to withhold 50
percent of the claim of the appellants. The effect of Section 3
of the mortgage clause in the Lloyd’s policy6 and s.150(1) of the
Insurance Act7 is to provide that if there is more than one
policy in effect covering a loss, then both policies are liable
to respond to the claim.
[56] Both the original policies and the Lloyd’s policy were in
the amount of $1.75 million. It is not disputed that if there
was to be a prorating between the two, it would have been on a
50/50 basis. Accepting that the existence of the original
policies was the only basis upon which Lloyd’s could properly
resist the claims of the appellants’ mortgagees then Lloyd’s, at
a minimum, should have paid 50 percent of the claim to the
mortgagees in a timely manner.
[57] The appellants argue that Lloyd’s breached its duty to pay
the amount of $1,588,000.00 in October 1990. This is the amount
of the loss that was eventually determined by the Master. This
exceeded the amount claimed by the appellants in their proof of
loss. The excess resulted from the fact that the building, which
had not been properly secured, deteriorated over time. The duty
of good faith, however, creates no higher an obligation on
Lloyd’s than to pay 50 percent of the loss claimed by the
appellants.
[58] Accordingly, I am satisfied that Lloyd’s failure to pay
$535,000.00 (50 % of the amount claimed rounded) to the
mortgagees within a reasonable period of time after the
appellants filed the proof of loss constituted a breach of
Lloyd’s duty to respond to the claim in good faith. This is a
breach of an implied obligation in the contract of insurance and
would entitle the appellants to recover damages, if any, that are
distinct from the payment for the losses for which the policy
provided coverage.
d) Consequential Damages
[59] In 1992 and 1993, Lloyd’s paid a total of $2,222,240.00 to
the three mortgagees. This constituted payment in full of the
principal and accrued interest on each of the mortgages together
with solicitor-client costs incurred by the mortgagees in
bringing the action to recover payment under the policy against
Lloyd’s.
[60] It is accepted that these payments to the mortgagees were
also sufficient to pay in full the amount of the insured loss,
$1,583.644.00, pre-judgment interest on that amount at the rate
of 14 percent from January 1991, and the solicitor-client costs
of the mortgagees. The payments to the mortgagees have therefore
satisfied in full Lloyd’s obligation to indemnify the insured
loss under the policy. Indeed, the payments were over
$450,000.00 in excess of the policy limits of $1.75 million.
[61] In July 1993, the appellants amended their statement of
claim to claim to claim consequential damages arising from the
delay in payment of the claim. The appellants’ theory of
consequential damages is that if the insured loss had been paid
in October 1990, 60 days after the mortgagees filed their proofs
of loss, the amount owing under the policy together with the
value of the land at the time would have exceeded the principal
and interest owing on the three mortgages. The excess value,
which the appellants claim would have been $727,566.50, would
have then been paid to them. The refusal by Lloyd’s to pay at
that time, the appellants argue, resulted in interest accruing on
the mortgages and in the mortgagees incurring legal costs which
were paid from the insurance proceeds with the result that there
was nothing remaining for the appellants.
[62] The appellants set out the calculation of this damage claim
in their factum as follows:
Compensable Loss at October, 1990
$1,583,644.80
Less Insurance Deductible
5,000.00
Owing by Lloyd’s Open Market in October, 1990
$1,578,644.80
Plus Plaintiffs’ land value in October, 1990
870,000.00
Value of Land and Building
$2,448,644.80
Less monies due to Plaintiffs’ mortgagees in October 1990
1,721,078.30
Equity of Plaintiffs
$727,566.50
Plus Plaintiffs’ litigation on expenses defending mortgagees’ actions as determined by the trial Judge
51,768.14
Consequential Loss to Plaintiffs – (excluding interest)
$779,334.64
[63] This claim is flawed in several respects. First of all, it
assumes that the total loss of $1,583.644.00 should have been
paid in October 1990. In fact, the appellants proof of loss
which was the only proof of loss provided to Lloyd’s that set out
the details of the loss claim, was not provided until November
20, 1990. Moreover, that claim was only in the amount of
$1,068,000.00, not the higher amount assessed found to be owing
by the Master. The claim was not payable until January 1991 and
then, as I have said above, only to the extent of 50 percent of
the amount claimed.
[64] The appellants’ consequential damages claim is also based on
the assumption that the value of the land in October 1990 was
$870,00.00. In fact, the first mortgagee received $500,000.00
when the land was sold in February 1992 to the City of Vanier.
There is nothing in the evidence to suggest that this was an
improvident sale, nor that if the first mortgage had been paid
$535,000.00 in January 1991, the sale proceedings would not have
continued and come to the same result. There would still have
been in excess of $300,000.00 owing on the first mortgage, which
was in default, and a total of over $1.2 million owing on the
three mortgages.
[65] The appellants led evidence that in September and October
1990 they received offers to purchase the land and building in
the amounts of $980,000.00 and $1,020,000.00. The appellants say
that they were unable to proceed with these sales because there
was an outstanding work order from the City requiring certain
repairs. There is no evidence to suggest that if Lloyd’s had
paid $535,000.00 to the first mortgagee in January 1991 that the
payment would have been used for anything other than reducing the
amount of the mortgage debt. The hotel was heavily mortgaged.
The appellants were apparently without funds or unwilling to
spend their own money in order to address the problem giving rise
to the work order. Assuming these offers were still open in
January 1991, the appellants would have been in no better
position than they were when they were unable to accept the
offers in September or October 1990.
[66] The appellants did not put forward a theory of damages
premised on the narrower breach of duty that I have found. I am
satisfied, however, that the failure by Lloyd’s to pay
$535,000.00 to the first mortgagee in January 1991 did not result
in any loss for which the appellants have not already received
the benefit through the payment of interest in full to the
mortgagees.
[67] There is no evidence to support a conclusion that anything
different would have occurred to the benefit of the appellants if
that payment had been made. It appears that the land would have
been sold at the same price; the mortgagees would have continued
their action to recover the balance of the loss and incurred
legal expenses in doing so; the loss would have been assessed at
the same amount; and the appellants would have incurred legal
expenses defending the mortgagees’ action against them.
[68] It is true that Lloyd’s would not have been required to pay
interest on the $535,000.00 that should have been paid to the
first mortgagee in January 1991 (roughly $100,000.00), however,
there would still not have been any money remaining for the
appellants from the proceeds payable under the policy.
Accordingly, I am satisfied that the evidence does not show that
the appellants suffered any damage resulting from the failure of
Lloyd’s to pay one half of the amount claimed in January 1991.
e) Punitive Damages
[69] The appellants also submit that the trial judge erred in
denying their claim for punitive damages.
[70] In Whiten v. Pilot Insurance, Laskin J.A. set out the two
requirements for an award of punitive damages as follows, at p.
649:
For an award of punitive damages to be made, two
requirements must be met: first, the defendants must have
committed an independent or separate actionable wrong causing
damage to the plaintiff; and second, the defendant’s conduct
must be sufficiently ‘harsh, vindictive, reprehensible and
malicious’ [cite omitted] or ‘so malicious, oppressive and
highhanded that it offends the court’s sense of decency’ [cite
omitted].
[71] The breach by Lloyd’s of its duty of good faith is an
independent actionable wrong from its failure to indemnify under
the policy. However, as I have concluded above, this breach did
not cause damage to the appellants. The appellants’ claim for
punitive damages therefore does not satisfy the first requirement
set out in Whiten.
[72] In addition, the facts in this case fall far short of
meeting the second requirement. Lloyd’s should have paid 50
percent of the amount being claimed in January 1991. Once
ordered to pay the money, Lloyd’s responded in a reasonable
manner. Other than the interest on the delayed payment, which
Lloyd’s paid, the appellants suffered no damage from the delay.
There is nothing in the evidence to show that Lloyd’s was
motivated by malice or that it acted vindictively. Lloyd’s
conduct does not offend a sense of decency nor, in my view, is it
deserving of punishment. In my view, this is not a case for
punitive damages.
DISPOSITION
[73] In the result, I would dismiss the appeal. In view of my
finding that Lloyd’s did breach the duty of good faith, albeit
not in a way that resulted in any damages, I would make no order
as to costs of the appeal.
Released: Mar 22 2000
“Dennis O’Connor J.A.”
“I agree G.D. Finlayson J.A.”
“I agree K.M. Weiler J.A.”
1 Laskin J.A. was writing in dissent, but not on this point.
2 11. In the event of disagreement as to the value of the
property insured, the property saved or the amount of the loss,
those questions shall be determined by appraisal as provided
under the Insurance Act before there can be any recovery under
this contract whether the right to recover on the contract is
disputed or not, and independently of all other questions. There
shall be no right to an appraisal until a specific demand
therefore is made in writing and until after proof of loss has
been delivered. [Emphasis added.]
3 Section 2 of the mortgage clause provides that if Lloyd’s pays
the mortgagees the loss under the policy and if Lloyd’s claims
that it had no liability to the appellants, it becomes subrogated
to the rights of the mortgagees against the appellants to the
extent of the amount paid to the mortgagees.
4 s. 147(1) Where the loss, if any, under a contract has, with
the consent of the insurer, been made payable to a person other
than the insured, the insurer shall not cancel or alter the
policy to the prejudice of that person without notice to that
person.
5 5. This contract may be terminated, (a) by the insurer giving
to the insured fifteen days’ notice of termination by registered
mail or five days’ written notice of termination personally
delivered.
6 3. Other Insurance – If there be other valid and collectible
insurance upon the property with loss payable to the mortgagee –
or in equity – then any amount payable thereunder shall be taken
into account in determining the amount payable to the mortgage.
7 Section 150(1) of the Insurance Act provides:
Where on the happening of any loss or damage to property there is
in force more than one contract covering the same interest, each
of the insurers under the respective contracts is liable to the
insured for its rateable proportion of the loss, unless it is
otherwise expressly agreed in writing between the insurers.