Court File and Parties

2019 ONSC 2034 COURT FILE NO.: CV-13-487406 DATE: 20190401 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: 688857 ONTARIO LIMITED o/a A TO Z PROPERTIES, Plaintiff AND: AVIVA INSURANCE COMPANY OF CANADA, Defendant

BEFORE: Stinson J.

COUNSEL: Melvyn L. Solmon and Rajiv Joshi, for the Plaintiff Anne Juntunen, for the Defendant

HEARD at Toronto: by written submissions

Reasons for Decision as to Costs

[1] In my Reasons for Judgment released October 11, 2018, I ordered defendant to pay plaintiff $58,761 on account of covered losses under a policy of fidelity insurance. I also awarded plaintiff prejudgment interest on the sum owed to it, which would increase plaintiff’s recovery to approximately $66,000. I dismissed plaintiff's claims for damages for breach of the duty of good faith and for aggravated and punitive damages.

[2] The parties subsequently made written submissions with respect to costs. Plaintiff seeks an award of costs on a substantial indemnity basis in the amount of $330,347 or in the alternative on a partial indemnity basis in the amount of $240,563.

Liability for Costs

[3] In the ordinary course, a successful party is entitled to recover costs from an unsuccessful party. In this case, however, plaintiff obtained a judgment for less than $60,000 (excluding interest). That sum is well within the $100,000 limit for which the Simplified Procedure set out in Rule 76 of the Rules of Civil Procedure is mandatory. Defendant therefore argues that, since plaintiff did not commence and continue the action under the Simplified Procedure, but rather as an ordinary action, the cost consequences set out in rule 76.13(2) should apply. Simply summarized, that rule provides that where the amount awarded is $100,000 or less, exclusive of interest and costs, a plaintiff shall not recover any costs unless the court is satisfied that it was reasonable for the plaintiff to have commenced and continued the action under the ordinary procedure.

[4] Thus, as a preliminary matter, I am required to decide whether it was reasonable for plaintiff to have prosecuted the action under the ordinary procedure. For the reasons that follow, I conclude that it was reasonable for the plaintiff to have done so.

[5] As mentioned, this was a claim on a policy of fidelity insurance, arising from the theft of residential apartment rental payments by an employee of plaintiff. Plaintiff is a residential landlord. The trial involved two main issues. The first was whether the defaulting individual was an employee whose activities would be covered by the policy, or an independent contractor whose activities would not be covered. The second main issue concerned whether plaintiff was able to prove its alleged losses. In addition, as noted, plaintiff advanced claims for breach of the duty of good faith, punitive and aggravated damages, arising from the fashion in which the claim was handled by defendant.

[6] As the result indicates, I agreed with plaintiff's contention that that the individual in question was an employee and I disagreed with the assertion of defendant that he was an independent contractor. To arrive at that conclusion, I had to examine in detail the evidence of the two sides that bore on this issue. It was also necessary to examine in detail the fashion in which the claim was adjusted and the basis upon which defendant concluded that the loss was not covered. This process entailed, among other things, analyzing the evidence of defendant’s in-house claims examiner and outside claims adjuster to understand how they reached their conclusion to deny the claim and to assess whether it was correct. In addition, of course, it was necessary to review and analyze plaintiff’s evidence concerning this issue.

[7] I mention the nature of the analysis required to determine this fundamental issue because, in my view, it bears upon plaintiff's decision to pursue the claim by way of the ordinary procedure. The parties had starkly different perspectives on the issue whether the defaulting individual was an employee or an independent contractor. This was a question of mixed fact and law that warranted a detailed examination of the evidence, both at the discovery and trial stages. In my view, the ordinary procedure was appropriate for the exploration of the factual and legal issues associated with that determination.

[8] Additionally, plaintiff was advancing a claim for bad faith handling of the claim. In the final analysis, I decided that the shortcomings in defendant’s conduct did not, in the aggregate, amount to proof of bad faith. In my view, however, those shortcomings provide further support for the conclusion that it was reasonable for plaintiff to utilize the ordinary procedure in prosecuting this claim. The evidence generated on discovery and elicited at trial highlighted several shortcomings in defendant’s practices. Among other things, it emerged at trial that the claims examiner had no familiarity with the decided case law dealing with the distinction between employees and independent contractors. The adjuster’s report to the claims examiner contained extraneous or incorrect information upon which he relied to support his recommendation to deny the claim. Despite my conclusion that defendant's conduct fell short of crossing the line into the realm of bad faith, the proper exploration of these topics at discovery and trial utilizing the processes of the ordinary procedure were, in my view, warranted.

[9] I am therefore satisfied that it was reasonable for plaintiff to have commenced and continued the prosecution of the action under the ordinary procedure. I therefore decline to impose the cost consequences provided in rule 76.1(2).

[10] In the alternative, defendant argues that plaintiff should be deprived of its costs of trial by reason of a settlement proposal made by the defendant one week prior to trial. That offer was all-inclusive and, by my assessment, was significantly inadequate to cover all of the claim, interest and costs. I thus do not see it as a proper basis to deny an award of costs.

[11] Instead, I hold that plaintiff, as the successful party, is entitled to an award of costs payable by defendant.

Scale of Costs

[12] At the outset of its costs submissions, plaintiff sought costs on a substantial indemnity basis. In support of that request, plaintiff submitted that I had found that defendant and its adjuster were applying the wrong principles to dishonest employee claims. I made no such finding. Rather, I merely found it surprising that the claims examiner was unfamiliar with any case law concerning the treatment of this issue by the courts. The refusal of the claim by defendant was, in part, based on facts that were erroneously confirmed as correct by plaintiff.

[13] While it is true that I found the claims examiner’s unfamiliarity with case law a troubling shortfall in defendant’s training regime, it falls well short of the type of misconduct that would warrant an award of substantial indemnity costs. The law is clear that substantial indemnity costs are reserved for rare and exceptional cases where the paying party has been guilty of serious misconduct, either in connection with the events leading up to the litigation or in the conduct of the litigation itself. Neither exception applies to the present case.

[14] Offers to Settle were exchanged by both sides. None attracts the cost consequences prescribed by Rule 49 of the Rules of Civil Procedure. All of plaintiff’s offers were for amounts greater than it recovered at trial.

[15] I therefore conclude that plaintiff's costs should be assessed on a partial indemnity basis only.

Quantum

[16] It is apparent at the outset that plaintiff’s partial indemnity costs claim of $240,563 is almost four times the amount of its recovery at trial, $66,000. Based on the principle of proportionality and other grounds, defendant argues that the amount claimed is unreasonable and excessive.

[17] The principles applicable to fixing costs are well known. The general principles and leading authorities were summarized in Agius v. Home Depot Holdings Inc., 2011 ONSC 5272 at paras 10 through 12. The overriding principle is that the amount of costs awarded be reasonable in the circumstances: see Davies v. Clarington (Municipality) (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.).

[18] Against that backdrop, I turn to a consideration of the applicable principles set out in rule 57.01(1)(0.a) through (i) of the Rules of Civil Procedure.

(0.a) - The principle of indemnity, including rates charged and hours spent by the party’s lawyer.

[19] In relation to this factor, I note as follows. As initially mapped out at the pretrial conference, this was to be a four-day trial. It morphed into a nine-day proceeding. This was caused in part by an unnecessary voir dire (due to a technical objection by the defendant that was founded on an oversight by plaintiff’s counsel to serve an Evidence Act notice), unneeded evidence from an executive of the defendant called as plaintiff’s witness, and various inefficiencies attributable to document production and proof (attributable to both sides), among other reasons. In summary, the trial was much longer than it ought to have been. Some of this responsibility rests on the plaintiff and thus the full costs of the trial ought not be visited upon the defendant.

[20] I further note that this was not a case that warranted or required the attendance of experienced senior counsel on behalf of plaintiff, plus a junior, especially in light of the amount involved.

[21] This brings me to the matter of hourly rates. For a significant portion of the proceeding, (from September 6, 2017 onward) plaintiff and its counsel had a contingency fee agreement (undisclosed), that apparently increased the lawyers’ hourly rate significantly. In my view, that increase (which amounted to 150% of the base rate) cannot be visited on the defendant. If the client wishes to pay its lawyer a rate which exceeds the prevailing standard, that arrangement should affect only their relationship, and not the obligations of a paying adverse party.

[22] These factors militate in favour of reducing the amount of costs recoverable by the plaintiff.

(o.b) – the reasonable expectations of the paying party.

[23] In my reasons for decision, I expressly invited the defendant to submit the bill of costs it would have presented had it been successful at trial. The defendant accepted that invitation, and submitted a bill that included partial indemnity costs of $98,272.62. Of that sum, fees, inclusive of HST, amounted to $91,759.50 as compared to plaintiff's fees of $179,560.76. Defendant’s disbursements were $6,513.12 compared to plaintiff’s disbursements of $61,005.08, of which more than half was attributable to the costs of the plaintiff's expert ($34,494.38).

[24] I mention the foregoing information because, in my view, it provides a useful basis to assess whether the defendant could reasonably expect to pay the sums claimed by the plaintiff for costs. This was hard fought litigation in which each side incurred significant costs to carry the case through trial, each being conscious of the value of plaintiff's underlying claim. Thus defendant had to be aware that plaintiff was incurring significant costs and it was prepared to do likewise. This factor militates in favour of a more generous assessment of the plaintiff’s costs.

(a) – the amount claimed and the amount recovered in the proceeding.

[25] The plaintiff initially claimed that its losses from the illegal conduct of its former employee exceeded $100,000. The plaintiff also claimed substantial amounts for punitive damages on account of alleged plant bad faith conduct by defendant. Ultimately, I assessed plaintiff's recovery arising from the illegal conduct at less than $60,000 (excluding interest). I dismissed the punitive damage and bad faith claims entirely.

[26] The quantum of actual recovery as compared to the amount of costs raises the issue of proportionality. Defendant argues that plaintiff's costs claim is wholly out of proportion to the amount recovered. Other judges have commented, however, that proportionality should not be the overriding or even the predominant factor: see for example Sanderson J. in Persampieri v. Hobbs, 2018 ONSC 368; and Gray J. in Cimmaster v. Piccione, 2010 ONSC 846, for example.

[27] From this plaintiff's perspective, placing too much emphasis on the element of proportionality would have an adverse impact on access to justice. The plaintiff is a small business, while the defendant is a very large and very well resourced insurance company. In the final analysis, I found the plaintiff's basic claim to be well founded. Had the defendant not wrongly denied coverage, the litigation might never have proceeded. Placing too much emphasis on the factor of proportionality could well result in the plaintiff netting nothing, despite its success at trial. I would therefore discount the significance of this factor.

(b) - apportionment of liability.

[28] I found defendant wholly responsible for the amount of the provable claim under the policy. As noted, I dismissed the remaining claims asserted by plaintiff. Thus, on the substantive claim that gave rise to the litigation, plaintiff was wholly successful. This factor slightly favours plaintiff.

(c) - complexity of the proceeding.

[29] This was a matter of moderate complexity. In relation to liability, plaintiff had to satisfy me that the employee versus contractor test should be decided in its favour. This entailed mastering and adducing the necessary evidence and rebutting defendant’s argument that plaintiff had conceded the point during the course of adjustment of the claim. Another complexity concerned proof of plaintiff's loss, in light of the fact that the defaulting party had absconded with all almost all business records. This was a challenging exercise that included retaining and instructing a forensic accountant to present the available information in a cogent and persuasive fashion.

[30] This factor therefore favours a more generous costs allowance.

(d) - importance of the issues.

[31] From the perspective of the plaintiff, the loss it suffered due to the defalcation of the ex-employee was a material sum. The issues were therefore important to it. This factor therefore favours plaintiff.

(e) - any conduct that tended to shorten or lengthen the proceedings.

[32] See my previous comments.

(f) - whether any step in the proceeding was improper, etc.

[33] See my previous comments.

(g) - improper denial of or refusal to admit.

[34] I do not consider this a relevant factor. Plaintiff presented incomplete and confusing information with respect to its loss when it first dealt with the defendant. Defendant quite properly questioned whether the information provided was reliable. In the circumstances, I do not fault defendant for requiring plaintiff to prove its case (although it does not absolve defendant from paying the costs of doing so – see (i) below). This factor is therefore neutral.

(h) - more than one set of costs

[35] This factor is inapplicable.

(i) – other relevant matters, if any.

[36] By reason of the misconduct of the ex-employee (who stole not only rental money but also business records) in order to prove its claim plaintiff had to retain the services of a forensic accountant. I accepted most of that expert's findings and conclusions, although I added a further discount to the loss calculated by the expert. In my view, since plaintiff was required to prove its claim formally in this fashion, it is only fair to require defendant to pay the full cost of this disbursement.

Summary and Disposition

[37] Taking into account the foregoing factors as weighed by me, I fix plaintiff’s recoverable partial indemnity fees at $120,000 plus HST of $15,600, for a total of $135,600 (a reduction of almost $44,000). To that sum I would add disbursements of $61,009.08 (comprised of $26,510.70 (inclusive of HST) as claimed and the expert fee disbursement of $34,494.38 (inclusive of HST)). The result is a total costs award of $196,609.08.

Stinson J. Date: April 1, 2019