Khazzaka o/a E.S.M. Auto Body v. Commercial Union Assurance Company of Canada
[Indexed as: Khazzaka v. Commercial Union Assurance Co. of Canada]
66 O.R. (3d) 390
 O.J. No. 3110
Docket No. C32399
Court of Appeal for Ontario, Carthy, Laskin and Gillese JJ.A.
August 14, 2002*
* This judgment recently came to the attention of the editors.
Damages — Punitive damages — Insurer defending action by insured on sole basis that insured had committed arson — Jury rejecting theory of arson — Independent adjuster retained by insurer acting unreasonably and in bad faith in doggedly pursuing his belief in suspicious origins of fire while ignoring evidence to contrary — Jury would have been justified in finding that adjuster was lying for sole purpose of obtaining judgment dismissing claim — Insurer having obligation to closely oversee conduct of arson defence and assure itself that insured was being treated fairly — Insurer liable in punitive damages for conduct of its independent agents — Award of punitive damages against insurer in amount of $200,000 affirmed on appeal.
Insurance — Agents — Insurer defending action by insured on sole basis that insured had committed arson — Jury rejecting theory of arson — Independent adjuster retained by insurer acting unreasonably and in bad faith in doggedly pursuing his belief in suspicious origins of fire while ignoring evidence to contrary — Insurer having obligation to closely oversee
conduct of arson defence and assure itself that insured was being treated fairly — Insurer liable in punitive damages for conduct of its independent agents.
The plaintiff’s automobile repair shop was seriously damaged by fire. The Fire Chief, his staff and the Ontario Provincial Police thoroughly investigated the incident and no-one suspected arson. The defendant insurer did not agree. It retained L as an independent adjuster. L was suspicious as to the cause of the fire and decided that further investigations should be carried out. L retained S, a highly experienced fire investigator. It was the theory of L and S that the plaintiff had poured gasoline on the floor from a red container found at the scene and then intentionally lit the fire. The jury rejected this theory in favour of that of the plaintiff’s expert and the fire and police officials who considered the fire of undetermined and accidental origin. The jury allowed the plaintiff’s claim for fire damage and awarded $200,000 in punitive damages against the defendant for its conduct in defending the action on the sole basis of arson. The defendant appealed the award of punitive damages. [page391]
Held, the appeal should be dismissed.
As the trial judge stated, the evidence entitled the jury to find that L and S had acted unreasonably and in bad faith. Far from being a disinterested, objective adjuster, L doggedly pursued his conclusion that the fire was incendiary, ignoring evidence that militated against him. It was open to the jury to find that L, in a very partisan way, did his best to get the firefighters and police to change their opinion about the origin of the fire. L also sought, unsuccessfully, to convince counsel for the defendant to threaten the plaintiff with criminal proceedings. At trial, counsel for the plaintiff utterly demolished L’s evidence on significant matters on more than one occasion, justifying a jury not only in rejecting his testimony but in concluding that he was lying for the sole purpose of obtaining a judgment dismissing the claim. It was also open to the jury to conclude that S’s opinion was unworthy of credence. The defendant had a duty to treat the plaintiff fairly. It was not unfair to consult the fire department and police and refuse to accept their opinions without independent examination. It began to be unfair conduct when the defendant persisted in denying the claim when no credible basis for alleging arson arose from the investigation. The unfairness was exaggerated when the defence was pursued through a trial even while the evidence of its supporters crumbled beneath them.
Unfairness compounded over and over again amounted to conduct that merited the condemnation of the court when visited by an insurer that owed a duty of good faith to its insured. The defendant could not excuse itself by hiring reputable independent agents. They owed no duty to the plaintiff, but the defendant did, and its obligation continued through trial. It is no unreasonable burden on an insurer who alleges that the insured has committed a crime to closely oversee the conduct of the defence and assure itself at regular intervals that the insured who paid premiums for coverage is always being treated fairly. An award of punitive damages was appropriate in this case.
The defendant persisted over a three-year period in resisting what it should have known was a valid claim. The defendant knew the plaintiff to be a small businessman dependent upon his partially destroyed building for his income. It knew him to be in debt. It must have known that in a small community the word of arson would spread and mark the plaintiff indelibly, at least with suspicion. The amount of the award was not excessive.
Whiten v. Pilot Insurance Co.,  1 S.C.R. 595, 209
D.L.R. (4th) 257, 283 N.R. 1,  I.L.R. 1-4048, 2002 SCC
18, 20 B.L.R. (3d) 165,  S.C.J. No. 19, revg (1999), 42
O.R. (3d) 641, 170 D.L.R. (4th) 280,  I.L.R. 1-3659, 32
C.P.C. (4th) 3 (C.A.), revg (1996), 27 O.R. (3d) 479, 132
D.L.R. (4th) 568, 47 C.P.C. (3d) 229 (Gen. Div.), consd Statutes referred to
Mortgages Act, R.S.O. 1990, c. M.40, s. 6(1)
APPEAL by the insurer regarding an award of punitive damages
from a judgment of Rutherford J.,  O.J. No. 3583 (S.C.J.) and an order of Rutherford J., unreported, May 26, 1999.
Harvey Poss, Q.C., for appellant.
Joseph Y. Obagi and Roxanne G. Cooligan, for respondent.
The judgment of the court was delivered by [page392]
 CARTHY J.A.: — Following an 11-day trial, the jury allowed the respondent’s claim of $157,000 for fire damage to his auto repair shop and, further, awarded $200,000 punitive damages against the appellant for its conduct in defending the action on the sole basis of arson. The appellant challenges the justification for punitive damages and says the amount is, in any event, excessive. In essence, the appellant argues that the verdict is unreasonable. I do not agree and would dismiss the appeal for the following reasons.
 The respondent’s repair shop is located on Highway 31 in the Village of Metcalfe and comprises two bays separated by a wall, each accommodating two vehicles. On September 6, 1997, the respondent was doing body work on one of the vehicles in bay number one. On his evidence he was in the process of welding a piece of metal in the area of the rear rocker panel, using a spot welder and an acetylene-oxygen torch. When he lit the torch he saw a flame inside the wheel well area of the vehicle and immediately proceeded to bay number two to obtain a fire extinguisher. When he returned to bay one there was an explosion and an extensive fire that caused burn injuries to him and largely destroyed the shop.
 The Fire Chief, his staff and the Ontario Provincial Police thoroughly investigated the incident, and no one suspected arson. It was concluded that the open flame ignited something such as a rag or fumes, that this spread to other combustibles in the area, and that the perceived explosion may have been a tire bursting in the heat. They agreed that the respondent’s version of events was consistent with their findings.
 The appellant did not agree. It retained Paul Laporte as an independent adjuster. Mr. Laporte was suspicious as to the cause of the fire and asked the Insurance Crime Prevention Bureau to investigate. He also retained Gene Szabo, a highly experienced fire investigator. Their theory, evolving from their respective investigations, was that the respondent had poured gasoline on the floor from a red container found at the scene and then intentionally lit the fire. The jury obviously rejected this theory in favour of that of the respondent’s expert and the fire and police officials who considered the fire of undetermined and accidental origin.
 Before the jury retired to consider its verdict, the defendant moved for a non-suit on the issue of punitive damages. The trial judge deferred hearing the motion until after the verdict, a wise move in the circumstances, and then heard argument and delivered reasons rejecting the motion. The trial judge was in a much better position than we are to assess the nuances of the evidence and the inferences that a jury might reasonably draw in arriving at its conclusion. I am therefore going to use his reasons as a format [page393] for expanding on the evidence relevant to punitive damages. The trial judge was writing at a time following the release of this court’s reasons in Whiten v. Pilot Insurance Co. (1999), 42 O.R. (3d) 641, 170 D.L.R. (4th) 280 (C.A.) and before the release of the Supreme Court’s reasons reported at 2002 SCC 18, 209 D.L.R. (4th) 257.
 The trial judge prefaces his particular references to the evidence with these remarks, at para. 8:
It is not my own view of the evidence and the facts and inferences that should be found and drawn from it, that counts. Indeed, I would not have awarded punitive damages in this case. On my own view of the evidence, the fire and the way it may have started leaves some puzzling questions.
However, the question is whether there was an adequate or sufficient evidentiary foundation, as a matter of law, to entitle the jury to award punitive damages against the defendant.
 He then deals, at para. 10, with the pre-trial conduct of Mr. Laporte:
The evidence entitled the jury to find that the defendant’s adjuster, Mr. Laporte, and the fire-cause expert Mr. Szabo, had acted unreasonably and in such a way as to justify the label “bad faith” and some of the other adjectives used in describing conduct worthy of punitive damages, being attached to the defendant’s handling of the plaintiff’s claim for loss. It was, in my view, open to the jury to find that Mr.
Laporte, far from being a disinterested, objective adjuster, pursued his search for a suspicious basis for the fire’s origin, in the face of the fire fighters’ and O.P.P.’s conclusions and on little or no real basis. It was open to them to conclude that Mr. Laporte decided very early that the fire was incendiary, and doggedly pursued that conclusion, ignoring evidence that militated against him. It was open to the jury to find that Mr. Laporte, in a very partisan way, did his best to get the fire fighters and police to change their opinion about the origin of the fire and call in the fire marshal’s office. Fire Chief Bennett and Deputy Chief Campbell both told the jury they got the impression that Mr. Laporte was not working in any co-operative way with them in trying to discern the cause of the fire but had concluded that it was incendiary and was looking for evidence on which to base that conclusion. When they explained the probable cause of what appeared a second origin, he ignored their explanation.
 The trial judge might have added that Mr. Laporte sought to convince the appellant’s counsel to threaten the respondent with criminal proceedings. Good sense prevailed, but Mr. Laporte’s mindset was clearly evidenced.
 The trial judge then continues:
Mr. Laporte denied all these things and presented himself as quite indifferent whether the claim was paid. He presented
himself as quite prepared to abide by whatever finding Mr. Szabo came up with. The jury could have, and must have found Mr. Laporte’s credibility quite lacking in this regard.
Evidence that may have influenced the jury in this regard came when Mr. Laporte’s file disclosed a note in his handwriting reflecting that the ambulance driver had smelled no trace of gasoline on the person or clothing of the [page394] plaintiff who suffered minor burns in the fire.
Yet, Mr. Laporte had never appeared to report that significant information nor could he even recall getting the information.
The matter of the red fuel container that seemed to be an important part of the defendant’s theory that the fire had been ignited intentionally by the plaintiff by pouring gasoline or some other flammable liquid on the floor of the garage and then lighting it must also have impressed the jury negatively. It is most probable that the jurors accepted the evidence of the three independent witnesses who testified it contained diesel fuel, a liquid difficult to ignite, and disbelieved Laporte and Morris who said they had ascertained that it contained gasoline. Their not having secured a sample for verification was a piece of evidence that could have contributed to an inference that the defendant’s position was premised on assumptions hastily drawn in a rush to judgment without much care for the facts.
 This excerpt treats Mr. Laporte in gentler terms than might be justified by the evidence he offered. On more than one occasion counsel for the respondent utterly demolished his evidence on significant matters, justifying a jury not only to reject his testimony but also to conclude that he was lying for the sole purpose of obtaining a judgment dismissing the claim.
 And then as to Mr. Szabo, the trial judge comments at para. 12:
The key, it seems to me, to the jury’s award of punitive damages, lies in what must have been their rejection of the opinion of Mr. Szabo, the “fire origin and cause” expert retained by the defendant to advise them. Mr. Szabo, a man of long experience and much learning in his field, confirmed Mr. Laporte’s and Mr. Morris’ view that the fire was incendiary in nature and not accidental as claimed by the plaintiff. I think, however, that it was open to the jury to find, on the evidence, that Mr. Szabo’s opinion was unworthy of credence. He clung to his opinion, shifting his footing as, on cross- examination, it was shown that he had no mastery of the facts at the scene. From the supposed gasoline in the red container to the reasonably precise location of the origin of the fire in relation to the car being worked on, the jury could justifiably, in my view, have drawn the inferential conclusion that Mr. Szabo, like Mr. Laporte, had set out to find and maintain arson, notwithstanding the facts.
 All of these observations were fully justified on the evidence. The trial judge could have gone further to discuss the evidence on which Mr. Laporte relied to suggest that the respondent had a motive for arson; namely, that he was in arrears of payments on his mortgage and the mortgagee was not named in the policy. From a legal point of view the mortgagee always has an interest in insurance proceeds: see the Mortgages Act, R.S.O. 1990, c. M.40, s. 6(1). However, even if it were otherwise, there is no practical sense to this attribution of motive. The respondent made his living repairing cars, and the contents of his garage were not insured under the policy. Thus, he could only suffer severe financial harm as a result of a fire. Only a person looking [page395] through a tunnel and willing to manufacture justification for a defence could see it otherwise.
 At paras. 13-14, the trial judge then concluded his reasons in these terms:
While I would not have drawn all these conclusions that I say were open to the jury, I think they are within the scope of what a reasonable jury could conclude. Even though the misconduct the jury must have found in this case doesn’t equal the misconduct described in the Whiten v. Pilot Insurance case, or indeed, overt misconduct as described in cases such as several referred to by Mr. Davis, there is room, in my view, to see through assertions by witnesses such
as Mr. Szabo and Mr. Laporte, and fasten on more subtle indicators of an unwillingness to yield to any conclusion but arson, and then to seek to shore up that conclusion with an evidentiary foundation and cling to the conclusion even when the foundation crumbled.
While words such as “reprehensible, oppressive, harsh, and malicious” are strong, and while misconduct worthy of punitive damages must “offend the court’s sense of decency”, I am, nevertheless, unable to conclude that as a matter of law, such adjectives should not have been chosen by the jury to describe the manner in which the defendant dealt with the plaintiff. It must be borne in mind that the plaintiff certainly fits Laskin J.A.’s description in the Pilot case of a vulnerable insured who is dependent on the insurer once the loss occurs.
 In my view, the evidence that the jury may have accepted and the reasonable inferences therefrom clearly establish a rational purpose for an award of punitive damages. As the trial judge pointed out, the critical facts in Whiten were more extreme and overt and largely occurred prior to trial. Here, the roots extend back to the early investigation, surface at trial and are supplemented by the nature of the testimony. The appellant had a duty to treat the insured fairly. It was not unfair to consult the fire department and police and refuse to accept their opinions without independent investigation. It began to be unfair conduct when the insurer persisted in denying the claim when no credible basis for alleging arson arose from that investigation. It was clearly unfair to concoct evidence of the presence of gasoline to support a defence, which may have been the jury’s finding. Unfairness multiplies as all obstacles to the viability of the defence of arson are turned aside without concern for the insured’s rights and well- being. The unfairness is further exaggerated when the defence is pursued through a trial even while the evidence of its supporters, in the trial judge’s word, “crumbled” beneath them. Unfairness compounded over and over again amounts to conduct that merits the condemnation of the court when visited by an insurer that owes a duty of good faith to its insured.
 The appellant cannot excuse itself by hiring reputable independent agents. They owe no duty to the insured. But the insurer [page396] does, and its obligation continues through trial. I see it as no unreasonable burden on an insurer who alleges that the insured has committed a crime to closely oversee the conduct of that defence and assure itself at regular intervals that the insured who paid premiums for coverage is always being treated fairly. I have chosen to use the word “fair” throughout as a word that any business person can understand and apply. Other similar expressions appear in the authorities, but they all seem to be directed at instructing insurers that they should be fair-minded, both to their shareholders in resisting payment when it is fair to do so and to their insureds in paying claims when it is fair to do so.
 I also see a rational purpose for punitive damages in this case as a deterrent. The jury award in Whiten was made in 1996, and it can fairly be assumed that the entire insurance industry became aware of the million dollar award shortly thereafter. Yet it had no apparent effect on the appellant’s conduct in dealing with this claim, which arose in 1997 and was tried in 1999. I recognize that by the time of trial this court had reduced the damages in Whiten to $100,000, but my point stands because the appellant’s conduct was consistent throughout.
 For these reasons, I conclude that an award of punitive damages was fully justified on the evidence.
 The appellant argues that, in any event, the amount of the award is excessive. I disagree.
 The trial judge very carefully cautioned the jury to be restrained in finding in favour of punitive damages and in setting the amount. For present purposes it must be assumed that the jury made all reasonable and available findings in favour of the respondent. It was therefore open to them to conclude that the appellant’s misconduct was very serious.
 The appellant persisted over a three-year period in
resisting what it should have known was a valid claim. The appellant knew the insured to be a small businessman dependent upon his partially destroyed building for his income. It knew him to be in debt. It must have known that in a small community the word of arson would spread and mark the insured indelibly, at least with suspicion. It does not have to come with handcuffs to severely damage a reputation. Yet, the appellant persisted for three years, learning nothing from the example of Whiten. These are some of the considerations that Binnie J. referred to in Whiten and they are sufficient to satisfy me that this award is proportionate and fits in the rational limits within which a jury should be permitted to operate. In addition, there is no risk of double recovery in this case because the jury was told that the insurer would be paying the respondent’s costs of the litigation. [page397]
 The appellant raised two other issues: first, that the opening statement by counsel for the respondent was too strident and held the defence experts up to ridicule; and second, that the trial judge in his charge failed to review the evidence in detail and to adequately put the position of the appellant. No objection to either was made at trial, and even if I found some reason to be critical, I would not interfere in the circumstances. In fact, counsel’s opening, as it related to the claim for punitive damages, quite naturally included some indignation — that is the foundation on which such a claim must be built. And the charge to the jury read in its entirety appears to me to be more than adequate and fair to both sides.
 The appeal is therefore dismissed. The respondent has filed a bill of costs and we invite the appellant to make submissions thereon within 14 days.