From the Canadian Journal of Insurance Law,
Volume 23, Number 2, March, 2005

In Whiten v. Pilot Insurance Co.,, an Ontario jury awarded $1 million in punitive damages against an insurer for breach of the insurer’s duty of good faith. Although this award was reduced to $100,000 by the Court of Appeal, in the Supreme Court of Canada the original award of the jury was restored.. The Whiten decision has prompted a great deal of debate among the insurance bar. On the basis of Whiten, there is a perception that punitive damages are now more readily available in bad faith claims, and that future awards will be substantial.

The impact of Whiten is still being worked out as the case law on breach of the insurer’s duty of good faith develops. Given the degree of interest in the Whiten decision, however, it is curious that a series of cases in which courts have awarded punitive damages against fraudulent insurance claimants has received little or no comment.

The cases typically involve a group of individuals who conspire together to stage motor vehicle accidents and submit false property damage and personal injury claims. These schemes are usually well-organized, and often involve multiple claims on behalf of individual participants. Punitive damage awards have ranged from $500 against minor players to as much as $100,000 against “ringleaders.”

As will be seen, there has been little debate in the courts as to whether punitive damages are justified in insurance fraud cases. Rather, the courts have repeatedly emphasized the active role the judiciary must play in ensuring that individuals who commit insurance fraud are penalized accordingly.

Despite the clear support of the courts, it is surprising that more insurers have not been willing to pursue punitive damages for fraudulent claims. To date, almost all of the cases involving claims for punitive damages against fraudulent claimants have been commenced by the Insurance Corporation of British Columbia. Despite policy statements that fraud is a serious corporate issue, few insurers have demonstrated the will to actively pursue fraudulent claimants in court. This, despite the high cost to the industry of insurance fraud.
 

Sanghera v. Thind^d is the first of the B.C. fraudulent claims cases. There were two actions before the court. The first was a tort action in which the plaintiffs claimed against an I.C.B.C. insured for damages arising out of a motor vehicle accident. I.C.B.C. defended the tort action by adding itself as a third party. It also commenced the second action, which was a claim against the plaintiffs in the first action for fraudulent conspiracy to obtain insurance benefits. The damages claimed by I.C.B.C. in the second action included amounts paid to the plaintiffs for collision damages and medical expenses, I.C.B.C.’s adjusting and investigation expenses, punitive damages, and the full legal costs incurred by I.C.B.C. in the two actions. The legal fees and disbursements constituted the bulk of the amount claimed in the second action.

The trial judge concluded that there had not in fact been any accident and dismissed the first action. Instead of assessing the damages claimed by I.C.B.C. in the second action, she determined that an award of solicitor and client costs in both actions would be sufficient to compensate the Corporation. I.C.B.C. appealed, and the Court of Appeal held that it was an error on the part of the trial judge to substitute costs for the damages claimed in the second action. The appellate court referred the matter back to the trial judge for an assessment of damages. One of the issues before the court on the assessment was the question of punitive damages; Proudfoot, J. emphasized the need to deter fraud against a public insurance program as the basis for her award^d.

The plaintiff also claims exemplary or punitive damages and I suggest this is a most appropriate case in which to make such an award. The defendants have committed a fraud on the Insurance Corporation of British Columbia. They have attempted to extract sums of money from an insurance program that is in place for the benefit of all the people of British Columbia. As I said in my original judgment, “nothing can destroy such a scheme more easily and more rapidly than abuse of that system, particularly when it is as artfully attempted as it was in the case at bar”. Not only must this type of claim be discouraged but it must be stopped if the system is to survive. There are five defendants involved in this matter. I think an appropriate award under this head of damage is $25,000.00.

I.C.B.C. had also raised claims for the return of benefits paid, adjusting and clerical staff costs, and legal fees. Proudfoot, J. referred to case law stating that the measure of damages for the tort of deceit is an award which puts the plaintiff in the position he would have been in had the fraudulent representation never been made. She concluded that all of the losses that directly flow from the fraud are recoverable, including consequential damages, subject only to remoteness and the plaintiff’s obligation to mitigate.

Payments made to the claimants before the fraud was discovered clearly come within the measure of damages for deceit, and the trial judge granted judgment for these amounts. An I.C.B.C. employee provided an estimate of the internal adjusting costs, testifying that the amount claimed was extremely conservative. This evidence was accepted by the trial judge, and these costs were added to the judgment.

The trial judge went on to conclude that since I.C.B.C.’s legal costs had all been incurred as a consequence of the fraud, the company was entitled to recover all its costs as damages for deceit. She refused the request of defendants’ counsel to have the costs referred to the registrar for assessment:

Counsel for the defendants confuses costs with damages. This is not a case of having the legal fees taxed as costs; this is a case of the plaintiff being returned as near as possible to their [sic] position prior to this scam or fraudulent scheme. Had no accident been reported, the plaintiff would not have had to pay out these moneys?. The plaintiff is entitled to recover all of its losses, including legal fees paid?. These are damages suffered, they are not costs.

The decision of the trial judge was varied in the Court of Appeal. On the punitive damages issue, the appellate court agreed with the trial judge that the defendants’ fraud was in reality a fraud on the public and therefore deserved punishment. Southin, J.A. took exception to the amount of punitive damages awarded, however, saying it was unclear whether the trial judge had awarded damages solely for the original fraud, or had also meant to punish the defendants for their false testimony at trial. Since exemplary damages can’t be awarded for perjury, and because it would be unfair to punish two defendants who hadn’t testified at trial, the Court of Appeal reduced the award under this heading from $25,000 to $15,000.

The Court of Appeal upheld the damages awarded by the trial judge for benefits paid before the fraud was uncovered, and for internal claims costs. The panel disagreed with the award of costs as damages, however, saying that no action lies for bringing an action that fails, except in the very narrow circumstance where a malicious abuse of civil process has resulted in special damage. Even in such a case, “special damage” does not include the costs of the prior proceeding, so the court substituted an award of solicitor and client costs for the award of costs as damages for deceit.

The issue of punitive damages for insurance fraud next came before the B.C. courts in I.C.B.C. v. Sam.. The action was a claim against 18 defendants who were part of a fraudulent scheme involving 8 car accidents. The plaintiff obtained default judgment against several defendants, and applied for an assessment of damages against those defendants only. Under the B.C. Supreme Court Rules, the defendants in default were deemed to admit the allegations against them in the statement of claim; in addition, the plaintiff filed affidavit evidence detailing the actions of the defaulting defendants. In one group of accidents, the defendants arranged a collision between a stolen car and a car registered in the name of one of the defendants. In a second group of incidents, the defendants alleged their vehicle was struck by an unidentified vehicle, when in fact no collision had occurred. The defendants had filed claims for personal injury and property damage based on the fraudulent accidents.

The court granted punitive damages ranging from $3,000 to $11,000, depending on the degree of culpability of each individual defendant. As in Sanghera, the court emphasized the fact that the defendants were part of “organized deliberate schemes to defraud the publicly owned plaintiff” as grounds for a punitive damages award. The degree of planning involved, as well as the use of stolen vehicles, were seen as aggravating factors; in addition, defendants who brought claims with respect to several accidents were subjected to higher punitive damage awards than defendants who participated in only one accident.

Although the court adverted to the principle that the inability of the defendants to pay could be a mitigating factor, there was no evidence of the defendants’ financial circumstances before the court, so this factor only meant that the court should be cautious. It was no bar to a summary assessment of punitive damages.. The court also mentioned that penalties imposed by the defendants in criminal proceedings could affect the award of punitive damages; in this case, however, there were no criminal proceedings.

In addition to punitive damages, the judgment included benefits paid to the defendants, along with investigation costs, the latter being established by means of affidavit evidence detailing the hours expended by I.C.B.C. employees, along with their hourly pay rates.

I.C.B.C. v. Lee^e0 involved a much more substantial conspiracy than the previous cases. The defendant Nguyen was a paralegal employed by a Burnaby law firm, and also a court interpreter. He used his knowledge of the legal system to recruit other participants in the scheme, and to plan the majority of the staged accidents. The Corporation claimed damages against nearly 60 individuals as a result of a total of 12 fraudulent accidents. Most of the defendants failed to enter an appearance or file a statement of defence, and I.C.B.C. moved to assess damages after obtaining interlocutory judgment against them.

The court was careful to acknowledge the difference between punitive damages and compensatory and aggravated damages, quoting the following passage from Huff v. Price^e1(in which the B.C. Court of Appeal refers to the reasons given by McIntyre, J. in the Supreme Court in Vorvis):

Punitive damages are measured by the degree of moral culpability of the defendant. They are not designed to compensate the plaintiff and they are not measured by an assessment of the plaintiff’s suffering. An element of willfulness or recklessness such as would underlie a finding of guilt in a criminal act is likely to be present before punitive damages will be awarded. But the defendant’s conduct need not be criminal. Mr. Justice McIntyre used such words to describe the conduct that would give rise to a claim for punitive damages as “harsh, vindictive, reprehensible and malicious,” but Mr. Justice McIntyre acknowledged that he had not exhausted the available adjectives.

. . .

The award of punitive damages should not try to do again what has been done by the compensatory damages, including the aggravated damages. But if some measure of further punishment is still required then the amount assessed should be consistent with the concept that it is punishment that is being imposed and not restitution that is being exacted. The award should not be inconsistent with the principles that underlie the imposition of criminal penalties. And, of course, if a criminal penalty has been imposed then that should be taken into account.

No criminal penalty had been imposed against the defendants in I.C.B.C. v. Le. The court did state, however, that the range of fines that would be imposed as punishment in a criminal prosecution for the same acts was a factor to be considered in assessing punitive damages.

The court took note of the fact that the scheme was well organized, and that specialized knowledge had been used to recruit participants for profit. The fact that some of the claimants had involved their children in the staged accidents, and made claims on behalf of the children, was considered an aggravating factor. Several defendants had instituted court actions in pursuit of their fraudulent claims, which the court described as an abuse of process. Participation in more than one accident was also considered an aggravating factor.

The court employed a sliding scale to calculate punitive damages awards in accordance with the degree of culpability of each individual defendant. A base award of $10,000 was assessed against every defendant. Defendants who had abused the process of the court by litigating false claims were to pay an additional $10,000 each. Those who were involved in multiple claims were to pay $15,000 in addition to the base amount of $10,000, while those who were involved in multiple claims and abuse of process were assessed an additional $20,000 over the base amount.

The highest award was reserved for the “mastermind” who initiated the scheme:

With regard to?Lin Nguyen, he was, as I have indicated, the mastermind behind this entire scheme. He was certainly directly involved in six of the staged accidents and he was indirectly involved in the other six accidents, since he was the one that set up the scheme initially. His actions resulted in a total loss for the six direct or directed accidents in the sum of $126,402.01. And for all twelve accidents which he was indirectly or directly involved as the mastermind of the scheme there was a total loss of $316,159.74. And the plaintiff is entitled to the amount of that sum for compensatory damages against Mr. Lin Nguyen. In addition, there will be an award of punitive damages against him in the sum of $100,000.

The court also awarded claims adjustment expenses, and “special costs,” or a full indemnification of all legal fees.

After the Whiten Decision

Following the Supreme Court of Canada’s decision in Whiten v. Pilot, I.C.B.C continued to vigorously pursue punitive damages for insurance fraud. In the 18 months following the Supreme Court decision, I.C.B.C successfully sought punitive damages for fraudulent insurance claims in no less than five separate cases. Collectively, I.C.B.C. has been awarded more than $600,000 in punitive damages since the Whiten decision.

In Insurance Corporation of British Columbia v. Hoang,13 I.C.B.C. sought damages against the 35 defendants for conspiring to stage various motor vehicle accidents and making fraudulent personal injury claims. Default judgment was granted against 14 of the defendants. In this decision, I.C.B.C. sought an assessment of damages arising out of the default judgments.

I.C.B.C. was awarded damages to compensate the corporation for monies paid out as a result of the fraudulent claims as well as the costs incurred in processing, reviewing and adjudicating the claims. Having found that the defendants had each committed fraud, the court seemed willing to grant I.C.B.C. punitive damages. The court noted that the conduct of the defendants in deliberately participating in a scheme to defraud the insurer was exactly the type of reprehensible conduct that called for an award of punitive damages.

However, the fact that fraud had been found was, in itself, not enough for the court to determine the quantum of damages. In determining whether punitive damages were appropriate and if so, determining the quantum of punitive damages, the Court focused on the conduct of the defendants. The Court decided that further information regarding the specific conduct of certain defendants was required. Based on the information before it, the court was able to decide on the punitive damage award against four of the defendants. After considering the facts, the court awarded punitive damages of $1,000 against three of the defendants individually and an award of $5,000 against the fourth.

Finally, in a further proceeding for judgment in accordance with the jury verdict,14 the court fixed special damages and punitive damages against three defendants who had neither settled with I.C.B.C. nor had their claims resolved in any other proceedings. The court awarded special damages against all of the three remaining defendants together with punitive damages ranging from $7,500 to $15,000. Bennett J also went on to affirm the punitive damages awarded by the jury against two other defendants, a father and son. The jury awarded punitive damages against the son in the amount of $20,000. No punitive damages were awarded against the father.
In awarding the punitive damages, the court noted that an aggravating factor was that children had been used in the cars when certain accidents were staged. The defendant against whom $15,000 was awarded had used her own children in the accident, which the court felt had added considerably to the seriousness of her conduct.

In the next case, the Insurance Corporation of British Columbia v. Phung,15 I.C.B.C. sought damages against 26 individuals who had staged five motor vehicle accidents. I.C.B.C. obtained default judgments, including punitive damages, against many of the defendants. In awarding punitive damages, the court noted that, as in the Hoang case, the conduct of the defendants in deliberately participating in a scheme of fraud against the insurer was just the type of reprehensible conduct that called for an award of punitive damages.

More significantly, the court also noted that in each case, a fraud had been effectively committed on the public. The court accepted evidence from I.C.B.C. that the Corporation spent $10 million a year fighting fraud cases and that its estimated losses as a result of fraud were in excess of $150 million a year. The court further accepted I.C.B.C.’s estimate that insurance fraud resulted in a cost to each policyholder in the order of $150 per year. Insurance fraud, the court noted, was “a significant problem for the corporation” and one that had “a direct and serious effect on the public.”16

Ultimately, the court awarded punitive damages of $5,000 each against two of the defendants, and $15,000 against the third defendant. In regards to the fourth defendant, Phung, the court noted that he was involved in multiple claims and that his fraud had resulted in a loss to I.C.B.C. of over $44,000. The court also noted that Phung, like the third defendant, was a mastermind of the operation, organizing and encouraging other defendants. Taking into account his role, the court awarded punitive damages against him in the amount of $25,000.

I.C.B.C. was also successful in obtaining punitive damages in two other cases: Insurance Corporation of British Columbia v. Siemens17 in which it was awarded $5,000 in punitive damages against each of the defendants, and in Insurance Corporation of British Columbia v. Akers18 in which the punitive damages awarded ranged from $500 to $5,000. These cases involved legitimate motor vehicle accidents in which the participants lied to the police and the insurer regarding the identity of the driver because the driver was impaired at the time of the accident. The court indicated that the motive behind the fraud was relevant, in that a passenger who lied in order to protect someone else rather than for purposes of personal gain was held to be less culpable, while individuals who exaggerated their injuries and pursued court actions in an effort to extract money from an insurer were subject to higher punitive damages awards.

One of the most significant cases for I.C.B.C. since the Whiten decision involved the corporation’s suit against 25 defendants for staged motor vehicle accidents, Insurance Corporation of British Columbia v. Sun19.

In that case, ten of the defendants were subject to consent judgments or discontinuances. Of the remaining 15 defendants, 10 were subject to default judgments and the remaining 5 were found liable by jury. The jury awarded punitive damages against each of the 5 defendants and also awarded punitive damages against the 10 defaulted defendants. In its final verdict, the jury awarded punitive damages against the 15 defendants in amounts ranging from $20,000 to $75,000.

Judgement was granted to I.C.B.C. in accordance with the jury award and, ultimately, I.C.B.C.’s collective award for punitive damages against the 15 defendants amounted to $410,000.

What is striking about the Sun decision, apart from the overall size of the award, is the fact that the jury awarded significant punitive damages against defendants who had caused nominal losses to I.C.B.C. In the example of one defendant, where I.C.B.C.’s cost of adjudicating the fraudulent claim was assessed at $93, the jury awarded $20,000 in punitive damages. The court appeared to consider the discrepancy between the punitive damages and the actual loss to I.C.B.C but ultimately upheld the jury’s decision. In so doing, the court noted that the jury had awarded similar amounts against other defendants who had played small roles in the fraudulent scheme.

Other Jurisdictions

It appears that insurers other than I.C.B.C have rarely chosen to pursue punitive damages against fraudulent claimants, and as a result there are few reported decision son this issue outside British Columbia.

Two Alberta cases involving automobile insurance fraud are the exception20. Both cases involved the same insurer. In Al Asadi v. Alberta Motor Association Insurance Company,21 the plaintiff alleged that his car had been stolen. He then sued the insurer for its replacement value as well as for aggravated and punitive damages. The Court dismissed his claims, finding instead that the theft had not occurred and that he had willfully filed a false proof of claim. The court awarded $5000 in punitive damages against the plaintiff and in so doing, highlighted the judiciary’s role in penalizing those who engage in insurance fraud²²:

The courts must play their part in penalizing those insured who engage in insurance fraud in appropriate cases, as equally as they must punish insurers who fail to deal with the claims advanced by an insured in good faith. This is one of those appropriate cases.

In Haiduc v. Alberta Motor Association Insurance Company,²³the court again emphasized the active role the judiciary must play in penalizing those who commit insurance fraud. The plaintiff filed an auto theft claim in which he misrepresented the purchase price of the car as well as its accident and repair history. In addition, he submitted a fictitious bill of sale. The court awarded $1000 in punitive damages against the plaintiff and noted the following²⁴:

The plaintiff did not appreciate the high standard of candor and honesty required of him in dealing with his insurer. In fact, the plaintiff displayed a sense that what was going on between himself and the insurer was a game in which, if he won, he would get paid, and if he lost, he wouldn’t. It appeared that he saw the insurer as an adversary and that if he could get paid when he shouldn’t, or be paid more than he should have been paid, he would simply be “winning” and outsmarting his opponent.

Counsel for the defendant suggested that there was a crisis in the insurance industry due to the prevalence of fraudulent and exaggerated claims resulting in escalating insurance premiums which must be bourne by the insuring public. The defendant seeks punitive damages as an example, a message to others, a deterrent to discourage fraudulent claims. This is, in my view, a rational and appropriate use of punitive damages.

Beyond Motor Vehicle Fraud: Disability Claims

The court ultimately held that the contract of insurance had terminated as of the date the plaintiff’s misrepresentations first began. The court ordered the defendant to repay in excess of $250,000 in disability payments that had been made to him by Aetna.

In then considering Aetna’s claim for punitive damages, the court noted the following²⁶:

The contract of insurance between an insurer and an insured is one of utmost good faith. Implicit is a term of the contract that the insurer has an obligation to deal with the claims advanced by an insured in good faith and an insured has an obligation to the insurer to put forward his claims honestly and in good faith. As such, breach of that obligation on the part of either party constitutes a separate and independent wrong for which compensation is paid.

Having found that the plaintiff had breached the implied term of good faith, the court awarded punitive damages in the amount of $20,000, noting quite clearly that the obligation to act in good faith is a two-way street²⁷:

A great deal has been made in the case law, to which this Court was referred, of the fact that insurers vis à vis their insureds are in a superior bargaining position and one which places the insureds in positions of dependency and vulnerability. Equally, insurers must not be looked upon as fair game. It is a two-way street founded upon the principle of utmost good faith arising from the very nature of the contract.

The Court also noted that if the only consequence of the plaintiff’s fraudulent claim was that he forfeited that claim, then in effect he was no worse off than if he had been truthful in the first place. As such, deterrence, which was one of the objectives of granting punitive damages, would be given no effect.


Factors Considered in Awarding Punitive Damages for Insurance Fraud

In Hoang, the court summarized the factors that are to be considered by the court in assessing punitive damages²⁸. These factors include:

(1) Whether the claims pertain to a fraud on the public or are of the public interest such that they have an effect on that public body and public taxpayers;

(2) Whether the defendants’ conduct includes criminal conduct. If it does, the amount of the punitive damage award was to be consistent with the criminal penalty. The court also noted that if the defendant had been charged criminally, that fact should be taken into account;

(3) Any aggravating factors that might justify a higher aware of punitive damages. For example, whether the fraudulent acts were planned, organized, and deliberate; whether any specialized knowledge was used to implement the fraud; whether persons were recruited for profit; whether families and children were involved; whether the defendants participated in multiple claims; whether an individual defendant could be described as the “ringleader” behind a series of claims advanced by others; whether the defendants abused the court process by commencing actions based on the fraudulent claims; and

(4) Any mitigating factors, such as the limited financial means of the defendant, the fact that the defendant played a relatively minor role in a larger scheme organized by others; or the fact that a defendant was motivated by a desire to protect a friend or relative, rather than by personal financial gain.

Other cases have also been instructive on the factors a court will consider when determining the amount of the punitive damages to award. In Sam,29 the fact that there had been no submissions made with respect to financial positions of the defendants did not persuade the Court to “sidestep” assessing punitive damages entirely. The court will also consider the number of fraudulent acts committed by the defendants30 and degree of deceit perpetrated by the defendant.31 Courts have also recognized the rising trend in insurance fraud and the role of the court in deterring this trend and the important deterrent role punitive damages can play.³²

Conclusion


Although the cases discussed in this article deal primarily with frauds involving motor vehicle accident claims, fraud is a serious problem in many other areas of insurance, including property insurance, disability, and group health benefits. Since the cost of claims attributable to fraud is reflected in premiums, the adverse effects of widespread fraud impact not only insurers, but the public as well, whether the insurer involved is publicly owned or not.

Insurance provides individuals with a means of sharing risk among a larger community, and in doing so provides an important benefit to society as a whole. To the extent that fraud increases the cost of insurance, it also restricts its availability, placing the cost of insurance beyond the means of many people.

Police and prosecutors are often reluctant to commit scarce resources to the prosecution of insurance fraud cases, especially when the amount involved in an individual case is relatively small. Although fraudulent claims often do involve small amounts of money, the overall number of claims is large, and the cumulative social cost of numerous small frauds is substantial.

The purpose of an award of punitive damages is not to compensate the plaintiff, but to express society’s condemnation of certain kinds of conduct, and to deter the defendant and others from engaging in similar conduct in the future. Individuals who commit minor frauds against insurance companies face little risk of punishment through the criminal justice system. Unless insurers are prepared to pursue these claims in civil courts, there is little to deter unscrupulous individuals from submitting fraudulent claims.

Even if insurers are prepared to commit resources to civil suits against fraudulent claimants, an action to recover the amount paid out under the claim provides little or no deterrence. The defendant may be able to avoid payment of the judgment, but even if the insurer is able to collect, a judgment restricted to the amount paid out on the claim is the equivalent of a loan from the insurance company to the fraudulent claimant at a very favourable interest rate.

The willingness of courts in British Columbia and Alberta to award substantial punitive damages provides the insurance industry with an opportunity to address the problem of fraud in a serious way. The prospect of punitive damages is a real disincentive to the dishonest claimant. Historically, insurers have been reluctant to take action against fraud; to do so, a company must be prepared to commit resources both to the investigation of doubtful claims in order to marshal evidence of fraud, and to the pursuit of civil remedies through the court system. As the defendants are often impecunious, and are always unscrupulous people who can be expected to evade service of court papers, give false testimony, and avoid collection efforts, this is often perceived as throwing good money after bad. If the industry is to take advantage of the opportunity presented by the B.C. and Alberta decisions, however, companies will have to commit themselves to the pursuit of punitive damages, knowing that the amount actually recovered will often fall short of the expenditures required.

The principles set out in the B.C. and Alberta decisions are in accordance with established law on the issue of punitive damages. The decisions show that the civil justice system can address a serious problem in our society, and it is to be hoped that they will be followed by courts in other Canadian jurisdictions.

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