SGI Dodges A Bullet – Sort Of

Teresa Wilson was awarded punitive damages and costs on a solicitor-client basis against SGI for the way that it handled her claim for benefits. Ms. Wilson was injured in two vehicle accidents in 1995 and 1996 that led to a need for ongoing treatment. SGI funded those treatments for 10 years, reassessing Ms. Wilson’s condition and treatments from time to time along the way.

In 2006 a new adjuster was assigned to the file. Within a month of being assigned the new adjuster, unbeknownst to Ms. Wilson, embarked upon a file review and solicited an opinion from an SGI-paid physical therapist. The physical therapist was asked whether the need for ongoing treatments arose from the accidents and whether those treatments were of any benefit to Ms. Wilson. The opinion was equivocal on the issue of causation but adamant that the treatments were pointless. Based only on this opinion and despite a mountain of medical evidence from independent and SGI-paid medical evaluators that Ms. Wilson’s treatments were necessary to her continuing function the new adjuster advised Ms. Wilson that her benefits would be terminated in 6 months.

Ms. Wilson promptly sued SGI, as she was required to do by the provisions of the Automobile Accident Insurance Act, to prevent the termination of her benefits.  SGI subsequently decided that it would not terminate Ms. Wilson’s benefits but, despite a number of pointed inquiries from her lawyer, didn’t inform Ms. Wilson of that decision until the date set for termination had come and gone.

Ms. Wilson amended her statement of claim to add a claim for breach of the duty of good faith, seeking $10,000 in damages and costs on a solicitor-client basis. At trial Ms. Wilson acknowledged that she suffered no actual loss as a result of SGI’s threatened termination and subsequent reversal. The trial judge, after a detailed review of the facts, had no trouble finding the SGI had breached its duty of good faith and awarded Ms. Wilson approximately $15,300 in punitive damages composed of actual punitive damages of $7,500 and reimbursement of legal fees and disbursements in the amount of $7,800.

SGI appealed arguing that the threatened termination was merely an anticipatory breach of the policy that was never carried out. Since there was no breach of the policy Ms. Wilson suffered no damage and there was no breach of the duty of good faith. If there was no breach of the duty then there was no basis upon which to award punitive damages.

The Court of Appeal disagreed, at least with respect to the breach of the duty of good faith. The Court determined that the actionable nature of a breach of contract does not depend upon whether a loss occurred. The fact that one party suffers no loss from another party’s breach does not mean there was no breach. Such cases give rise to awards of nominal damages in recognition that a breach of contract occurred but caused no loss. SGI’s letter advising that benefits would be terminated in 6 months was a breach of the insurance contract even if it was never acted on.

As to the issue of punitive damages, the Court of Appeal determined that no such award should have been made. Firstly, because Ms. Wilson failed to include a plea for punitive damages in her Statement of Claim, an allegation of a breach of the duty of good faith was not enough. And secondly, the trial judge never undertook the sort of analysis needed to ground an award of punitive damages. That is, it is not enough to find a breach of the duty of good faith. The Court must go further to find that the conduct that led to the breach was so high-handed and egregious that it offended the Court’s sense of decency. Since the trial judge never embarked upon this further analysis the award of punitive damages was found to be unsupported and was set aside.

SGI didn’t completely dodge the bullet, however, and this is where it gets interesting for every insurer facing an allegation of breaching the duty of good faith.

The duty of good faith is an implied obligation arising from the nature of insurance contracts but independent of it. A breach of the duty of good faith is generally remedied by compensatory damages for the underlying breach of contract and, in the right circumstances, punitive damages. In Ms. Wilson’s case there were no damages flowing from the breach of the underlying contract and the trial judge made no finding that SGI’s conduct was sufficiently egregious to warrant an award of punitive damages.

Thus stymied the Court of Appeal turned their collective minds to the question of whether the punitive damage awards made by the trial judge could be sustained on some other legal basis and in doing so may well have fashioned a new remedy for breaches of the duty of good faith. The Court rightly determined that the award of $7,500 could only properly be characterized as punitive in nature and therefore unsustainable. But the $7,800 for legal fees and disbursements was a different story.

The Court posed the question of whether a breach of the duty of good faith is remediable with an award of damages and while it appears to suggest it is not the Court never actually answers the question in substance. Instead the Court shifts its focus to an examination of why the $7,800 in legal fees and disbursements were incurred by Ms. Wilson and finds that she had “no choice” but to incur these expenses to mitigate SGI’s anticipatory breach. As such these expenses are properly considered reasonable mitigation expenses for which the party in breach is responsible. Had the Court stopped there I would have no reason to write this article, but instead of characterizing these expenses as flowing from the breach of the underlying contract, the Court held that they flowed from SGI’s breach of the duty of good faith because “there is a direct link between SGI’s wrong [anticipatory termination of the contract?] and the litigation expenses Ms. Wilson incurred in mitigation {disputing that anticipatory termination through a lawsuit?]”.

The upshot for all insurers in Saskatchewan (at least for now) is that a breach of the duty of good faith could result in the insurer being obligated to pay the Plaintiff’s legal fees and disbursements, even though its conduct was not serious enough to warrant an award of punitive damages.