What Can Happen to An Insurance Company That Wrongfully Denies An Insurance Claim?
When An Insurance Company Denies Coverage In a Bad Faith Manner, Legal Action For Breach of Contract May Ensue and Such Legal Action May Also Involve Separate Claims For Bad Faith and Unfair Dealing That Seek General Damages and Punitive Damages.
Understanding What Can Be Done When An Insurance Company Fails to Act With Utmost Good Faith
When insurance is purchased, the buyer, being the insured who is also known as the policyholder, as well as the insurer, being the insurance company, are required to abide by the insurance contract principle known as utmost good faith. This principle applies at the time insurance is being negotiated and purchased as well as throughout the period of the insurance relationship and especially including at the time any claim is made against the policy. The duty is bilateral, meaning that both the insured person and the insuring company are obligated to act in utmost good faith with each other at all times. Of course, this duty of utmost good faith requires that the insured policyholder be honest and forthright with the insurance company as well as requiring that the insurance company also act in an honest and forthright manner including the performance of investigation of claims, and payment upon claims, fairly and justly.
The duties imposed upon an insurer via the utmost good faith principle were well explained by the Court of Appeal in the case of 702535 Ontario Inc. v. Non-Marine Underwriters Members of Lloyd's London, 2000 CanLII 5684 where it was said:
 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.
 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,  O.J. No. 2566 (Q.L.) (Gen. Div.); Labelle v. Guardian Insurance Co. of Can. et al.(1989), 38 C.C.L.I. 274 (Ont. H.C.J.); Jauvin v. L’Ami Michel Automobile Canada Ltee et al (1986), 1986 CanLII 2572 (ON SC), 57 O.R. (2d) 528 (H.C.J.).
 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.).
 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.
 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. 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.
 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.
Interestingly, per the 702535 case, an insurance company that fails to act with utmost good faith commits a separate cause of action that may result in claims for damages beyond the coverage within the policy. Said another way, when an insurance company denies a claim, and does so by breaching the utmost good faith principle, the insured person, being the policyholder may sue both for losses arising from the breach of contract, being the failure to provide the coverage provided within the insurance policy, as well as for further losses arising from the breach of the utmost good faith principle, being the separate wrongfulness for the manner in which the coverage within the insurance policy was denied. The arising of this separate cause of action was stated and well explained by the Supreme Court within the cases of Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanLII),  1 SCR 595 which addressed a separate claim for punitive damages due to the failure of good faith in the manner of coverage denial as well as Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30 (CanLII),  2 SCR 3 which addressed a separate claim for general damages arising from emotional injuries due to the manner of coverage denial or payment delays. Within Whiten and Fidler it was specifically stated:
78 This, as noted, is a breach of contract case. In Vorvis, supra, this Court held that punitive damages are recoverable in such cases provided the defendant’s conduct said to give rise to the claim is itself “an actionable wrong” (p. 1106). The scope to be given this expression is the threshold question in this case, i.e., is a breach of an insurer’s duty to act in good faith an actionable wrong independent of the loss claim under the fire insurance policy? Vorvis itself was a case about the employer’s breach of an employment contract. This is how McIntyre J. framed the rule at pp. 1105-6:
When then can punitive damages be awarded? It must never be forgotten that when awarded by a judge or jury, a punishment is imposed upon a person by a Court by the operation of the judicial process. What is it that is punished? It surely cannot be merely conduct of which the Court disapproves, however strongly the judge may feel. Punishment may not be imposed in a civilized community without a justification in law. The only basis for the imposition of such punishment must be a finding of the commission of an actionable wrong which caused the injury complained of by the plaintiff. [Emphasis added.]
This view, McIntyre J. said (at p. 1106), “has found approval in the Restatement on the Law of Contracts 2d in the United States”, which reads as follows:
Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort for which punitive damages are recoverable. [Emphasis added.]
Applying these principles in Vorvis, McIntyre J. stated, at p. 1109:
Each party had the right to terminate the contract without the consent of the other, and where the employment contract was terminated by the employer, the appellant was entitled to reasonable notice of such termination or payment of salary and benefits for the period of reasonable notice. The termination of the contract on this basis by the employer is not a wrong in law and, where the reasonable notice is given or payment in lieu thereof is made, the plaintiff — subject to a consideration of aggravated damages which have been allowed in some cases but which were denied in this case — is entitled to no further remedy . . . . [Emphasis added.]
Wilson J., with whom L’Heureux-Dubé J. concurred, dissented. She did not agree “that punitive damages can only be awarded when the misconduct is in itself an ‘actionable wrong’”. She stated, at p. 1130:
In my view, the correct approach is to assess the conduct in the context of all the circumstances and determine whether it is deserving of punishment because of its shockingly harsh, vindictive, reprehensible or malicious nature. Undoubtedly some conduct found to be deserving of punishment will constitute an actionable wrong but other conduct might not.
79 In the case at bar, Pilot acknowledges that an insurer is under a duty of good faith and fair dealing. Pilot says that this is a contractual duty. Vorvis, it says, requires a tort. However, in my view, a breach of the contractual duty of good faith is independent of and in addition to the breach of contractual duty to pay the loss. It constitutes an “actionable wrong” within the Vorvis rule, which does not require an independent tort. I say this for several reasons.
80 First, McIntyre J. chose to use the expression “actionable wrong” instead of “tort” even though he had just reproduced an extract from the Restatement which does use the word tort. It cannot be an accident that McIntyre J. chose to employ a much broader expression when formulating the Canadian test.
81 Second, in Royal Bank of Canada v. W. Got & Associates Electric Ltd., 1999 CanLII 714 (SCC),  3 S.C.R. 408, at para. 26, this Court, referring to McIntyre J.’s holding in Vorvis, said “the circumstances that would justify punitive damages for breach of contract in the absence of actions also constituting a tort are rare” (emphasis added). Rare they may be, but the clear message is that such cases do exist. The Court has thus confirmed that punitive damages can be awarded in the absence of an accompanying tort.
82 Third, the requirement of an independent tort would unnecessarily complicate the pleadings, without in most cases adding anything of substance. Central Trust Co. v. Rafuse, 1986 CanLII 29 (SCC),  2 S.C.R. 147, held that a common law duty of care sufficient to found an action in tort can arise within a contractual relationship, and in that case proceeded with the analysis in tort instead of contract to deprive an allegedly negligent solicitor of the benefit of a limitation defence. To require a plaintiff to formulate a tort in a case such as the present is pure formalism. An independent actionable wrong is required, but it can be found in breach of a distinct and separate contractual provision or other duty such as a fiduciary obligation.
83 I should add that insurance companies have also asserted claims for punitive damages against their insured for breach of the mutual “good faith” obligation in insurance contracts. In Andrusiw v. Aetna Life Insurance Co. of Canada (2001), 289 A.R. 1 (Q.B.), the court awarded $20,000 in punitive damages against an Aetna policy holder in addition to an order for the repayment of $260,000 in disability payments. The insurance company was not required to identify a separate tort to ground its claim for punitive damages. In that case it was the misconduct of the policy holder, not the insurance company, that was seen as such a marked departure from ordinary standards of decent behaviour as to invite the censure of punitive damages, per Murray J. at paras. 84-85:
This leaves the question of whether or not the plaintiff’s conduct was so reprehensible and high-handed that he should be punished for his behaviour. Counsel for the defendant makes the point that the plaintiff embarked on a deliberate course of conduct to misrepresent facts to the defendant in order to continue to collect disability benefits. If the only consequence of this behaviour is forfeiture of his claim then in effect he is no worse off than if he had been truthful in the first place and deterrence which is one of the objects of granting punitive damages is given no effect.
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. Thus, it is appropriate that punitive damages be awarded and I do so in the sum of $20,000.00.
I refrain from any comment on the correctness of this award, but to those who subscribe to “the sting” approach to punitive damages, I pose the question whether an award of $20,000 against a cheating policy holder in the Aetna case has at least as much “sting”, or possibly more, than the award of $1 million against Pilot in this case.
41 The right to obtain damages for mental distress for breach of contracts that promise pleasure, relaxation or peace of mind has found wide acceptance in Canada. Mental distress damages have been awarded not only for breach of vacation contracts, but also for breaches of contracts for wedding services (Wilson v. Sooter Studios Ltd. (1988), 1988 CanLII 3100 (BC CA), 33 B.C.L.R. (2d) 241 (C.A.)), and for luxury chattels (Wharton v. Tom Harris Chevrolet Oldsmobile Cadillac Ltd. (2002), 97 B.C.L.R. (3d) 307, 2002 BCCA 78). Some courts have included disability insurance contracts: see Warrington and Thompson v. Zurich Insurance Co. (1984), 1984 CanLII 1843 (ON SC), 7 D.L.R. (4th) 664 (Ont. H.C.J.). The Ontario Court of Appeal has endorsed contractual damages for mental distress where peace of mind is the “very essence” of the promise: see Prinzo v. Baycrest Centre for Geriatric Care (2002), 2002 CanLII 45005 (ON CA), 60 O.R. (3d) 474, at para. 34.
42 In Vorvis v. Insurance Corp. of British Columbia, 1989 CanLII 93 (SCC),  1 S.C.R. 1085, this Court described the line of cases awarding mental distress damages as standing for the proposition that “in some contracts the parties may well have contemplated at the time of the contract that a breach in certain circumstances would cause a plaintiff mental distress” (p. 1102). It is thus clear that an independent actionable wrong has not always been required, contrary to Sun Life’s arguments before us.
43 The view taken by this Court in Vorvis that damages for mental distress in “peace of mind” contracts should be seen as an expression of the general principle of compensatory damages of Hadley v. Baxendale, rather than as an exception to that principle, is shared by others. In Baltic Shipping, Mason C.J. of the High Court of Australia questioned whether one should confine mental distress claims for breach of contract to particular categories, noting:
. . . the fundamental principle on which damages are awarded at common law is that the injured party is to be restored to the position (not merely the financial position) in which the party would have been had the actionable wrong not taken place. Add to that the fact that anxiety and injured feelings are recognized as heads of compensable damage, at least outside the realm of the law of contract. Add as well the circumstance that the general rule has been undermined by the exceptions which have been engrafted upon it. We are then left with a rule which rests on flimsy policy foundations and conceptually is at odds with the fundamental principle governing the recovery of damages, the more so now that the approaches in tort and contract are converging. [p. 362]
Similarly, Professor J. D. McCamus argues, in The Law of Contracts (2005), at p. 877, that once peace of mind is understood as a reflection of, or “proxy” for the reasonable contemplation of the contracting parties, “there is no compelling reason not to simply apply the foreseeability test itself”. At this point, the apparent inconsistency between the general rule in Hadley v. Baxendale and the exception vanishes. See also: S. K. O’Byrne, “Damages for Mental Distress and Other Intangible Loss in a Breach of Contract Action” (2005), 28 Dal. L.J. 311, at pp. 346-47, and R. Cohen and S. O’Byrne, “Cry Me a River: Recovery of Mental Distress Damages in a Breach of Contract Action — A North American Perspective” (2005), 42 Am. Bus. L.J. 97.
44 We conclude that damages for mental distress for breach of contract may, in appropriate cases, be awarded as an application of the principle in Hadley v. Baxendale: see Vorvis. The court should ask “what did the contract promise?” and provide compensation for those promises. The aim of compensatory damages is to restore the wronged party to the position he or she would have been in had the contract not been broken. As the Privy Council stated in Wertheim v. Chicoutimi Pulp Co.,  A.C. 301, at p. 307: “the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed”. The measure of these damages is, of course, subject to remoteness principles. There is no reason why this should not include damages for mental distress, where such damages were in the reasonable contemplation of the parties at the time the contract was made. This conclusion follows from the basic principle of compensatory contractual damages: that the parties are to be restored to the position they contracted for, whether tangible or intangible. The law’s task is simply to provide the benefits contracted for, whatever their nature, if they were in the reasonable contemplation of the parties.
45 It does not follow, however, that all mental distress associated with a breach of contract is compensable. In normal commercial contracts, the likelihood of a breach of contract causing mental distress is not ordinarily within the reasonable contemplation of the parties. It is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration. The matter is otherwise, however, when the parties enter into a contract, an object of which is to secure a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made. The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security.
Interestingly, whereas bad faith in the manner of breach of contract, or breach of the utmost good faith principle, as a separately actionable wrong, triggers a separate limitation period. Whereas in Ontario, generally, there is a two-year limitation period within which to bring litigation as prescribed per section 4 of the Limitations Act, 2002, S.O. 2002, Chapter 24, Schedule B and yet the Insurance Act, R.S.O. 1990, c. I.8 frequently prescribes a one-year limitation period as applicable for some issues, difficulties can sometimes arise. Whereas, for example, the Insurance Act bars suing an insurance for breach of contract, the contract being the insurance policy, more than one year after damage is discovered to a home or business or more than one year after an automobile accident, some circumstances could arise where an insured, as the policyholder, is misled by bad faith into delaying litigation for more than one year; and accordingly, per the Insurance Act, such an insured would become barred from suing the insurance company. However, it was said within Whorpole v. Echelon General Insurance, 2011 ONSC 2234 in the context of a Motion to Dismiss that while the Insurance Act may require that legal action for breach of contract be commenced within one year, the separate cause of action arising from bad faith or unfair dealing is unaffected by the breach of contract limitation periods within the Insurance Act and therefore the two year general limitation period within the Limitations Act, 2002 may apply. Specifically, the Limitations Act, 2002, the Insurance Act, and the view within Whorpole state:
4 Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.
148 (1) The conditions set forth in this section shall be deemed to be part of every contract in force in Ontario and shall be printed in English or French in every policy with the heading “Statutory Conditions” or “Conditions légales”, as may be appropriate, and no variation or omission of or addition to any statutory condition is binding on the insured.
14. Every action or proceeding against the insurer for the recovery of a claim under or by virtue of this contract is absolutely barred unless commenced within one year next after the loss or damage occurs.
259.1 A proceeding against an insurer under a contract in respect of loss or damage to an automobile or its contents shall be commenced within one year after the happening of the loss or damage.
 Secondly, the plaintiff is suing not just for the property damage payable under the insurance contract, but also for damages for breach of the insurer’s duty of good faith and fair dealing. Mr. O’Brien, for the plaintiff, points out that such a claim has been held to be a separate cause of action from an action for the failure of an insurer to compensate for loss covered by the policy: Whiten v. Pilot Insurance, 1999 CanLII 3051 (Ont. C.A.) at para. 25, per Laskin J.A.. Mr. O’Brien submits that this separate actionable wrong is governed by the general limitation period of two years, such that the claim is not statute-barred.
 Mr. Goodman, for the defendant, answers this argument by relying upon Arsenault v. Dumfries Mutual Insurance Co., 2002 CanLII 23580 (Ont. C.A.). In that case, the plaintiff was suing for damages arising out of the denial of no-fault accident benefits. Section 281(5) of the Insurance Act stated that an action in respect of no-fault benefits must be commenced within two years of the insurer’s refusal to pay the benefits claimed. The plaintiff did not commence her action until five years after the refusal.
 Abella J.A. (as she then was) refused to accede to the argument that the claim for bad faith in refusing to pay these benefits could be distinguished from the claim for the benefits themselves, for purposes of determining the applicable limitation period. At that time, the general limitation period was six years, so that if the bad faith claim was treated as a separate and distinct claim from the claim for the benefits themselves, it would not have been statute barred.
I am prepared to assume, without deciding, that there can be an independent claim for bad faith conduct in respect of the insurer’s refusal to pay or continue to pay no-fault benefits. In order to establish such a claim, the appellant would first have to establish that the insurer’s termination of her benefits was improper. Such a claim must comply with the requirements outlined in ss. 280-284 of the Insurance Act, one of which is the two year limitation period for the institution of proceedings to determine this question. The appellant cannot, by the device of a claim for bad faith damages, extend threefold the length of that termination period.
 What distinguishes Arsenault from the case at bar is that the limitation period in that case was triggered by the refusal to pay benefits. Any failure to deal with the claim in good faith that led up to the denial of benefits had to have preceded the date of the refusal, and could not logically be separated from the denial of benefits itself. In other words, the bad faith claim and the claim that benefits were wrongly denied were one and the same. Since the Act provided a clear limitation period of two years from the date that benefits were denied, it provided a complete defence to the plaintiff’s claims.
 The case at bar, though, is quite different. The triggering event for coverage under the insurance policy is the date of the loss, which is the date of the car accident. However, the cause of action regarding the alleged bad faith dealing arises well after that date, including the plaintiff’s subsequent dealings with the adjuster and concluding with the dumping of the bloodstained wreck in the plaintiff’s driveway. The wrongful denial of coverage itself that is alleged here did not occur until October 9, 2008, more than one year after the accident. The Statement of Claim was issued less than one year later, well within the two-year general limitation period provided in s. 4 of the Limitations Act 2002, S.O. 2002 c. 24.
 I am not persuaded that the independent actionable wrong that has been pleaded by the plaintiff is statute barred.
When an insurance company breaches the contractual duty of good faith such conduct is viewed as an independent wrong, separate from the breach of contract, by the insurer. As a separate cause of action, the insured may seek punitive damages as a remedy for such conduct. Additionally, the insured is without a requirement to prove that any actual loss arose from the breach of the good faith duty. These principles were specifically stated in Barbara Lynn Carroll, by her litigation guardian Shannon Luknowsky v. Aviva Canada Inc. and Pilot Insurance Company, 2020 ONSC 6388 wherein it was said:
 In Whiten, the Supreme Court found that a breach of the contractual duty of good faith is independent of, and in addition to, the breach of contractual duty to pay the loss. It also held that breaching the contractual duty of good faith constitutes a separate actionable ‘wrong’ for which punitive damages could be recoverable. The insurer argued, as here, that even if the plaintiff were able to establish that its conduct constituted an “independent actionable wrong”, she failed to prove any separate and distinct damage flowing from it. The insurer pleads that the claim for punitive damages should have been dismissed accordingly. Justice Binnie rejected that argument, holding that punitive damages arising from a breach of a duty of good faith do not require proof of damages:
As to the respondent’s objection that the pleading does not allege separate and distinct damages flowing from the independent actionable wrong, the respondent’s argument overlooks the fact that punitive damages are directed to the quality of the defendant’s conduct, not the quantity (if any) of the plaintiff’s loss. As Cory J. observed in Hill, supra, at para. 196, “[p]unitive damages bear no relation to what the plaintiff should receive by way of compensation. Their aim is not to compensate the plaintiff, but rather to punish the defendant. It is the means by which the jury or judge expresses its outrage at the egregious conduct of the defendant”. [Emphasis added.]
The failure of an insurance company to act in good faith when investigating and determining whether to pay insurance claims is itself a wrongdoing independent of the breach of contract for failing to provide the coverage within the insurance policy. This separate act of wrongdoing may give rise to legal action for claims seeking general damages or even punitive damages where the wrongful coverage denial occurred with exceptional bad faith.
Furthermore, whereas, generally, legal claims for breach of contract by failing to provide coverage per the insurance policy contract must be made within one year, it is possible that legal claims for the separate wrongdoing involving bad faith may be permitted for up to two years after the separate wrongdoing itself.