What once was lost has now been found... and how!

A recent Court of Appeal ruling has important consequences for insurers who reject requests for mediation.

Many of you may recall that section 258.6(1) of the Insurance Act compels parties to mediate if the other party requests a mediation.  If one party refuses to do so, the statute states that the refusal is to be considered by the court in awarding costs:

The regulations go on to state that the insurer pays for the mediation.

The Ontario Court of Appeal has recently ruled on this section of the Insurance Act in a case called Keam v. Caddey, (2010) ONCA 565. It was an appeal from an Ontario Superior Court case in which Justice Whitten was asked to determine if the insurer's refusal to mediate pursuant to s. 258(6) entitled the plaintiff to costs on a substantial indemnification basis.

In this case, plaintiff's counsel requested mediation twice and went so far as to suggest possible mediators. However, the insurer refused to mediate both times as it did not believe that the plaintiff's injuries would meet the statutory threshold for compensation. However, three months before the trial was scheduled, the insurer did make an offer which included general damages. At the conclusion of the trial, the court awarded an amount higher than the insurer's offer but lower than the plaintiff's offer.

A.C.R. Whitten J. did not believe that refusing to mediate constituted high handed or "reprehensible, scandalous or outrageous conduct". He found that refusing to mediate was a genuine available position based on the insurer's view of the case. He went on to find that if the insurer chose not to mediate, it did so at its own risk as the continuation of the litigation will increase costs – which it will ultimately have to pay if it is unsuccessful in defending the action.

The Court of Appeal took a different view. Feldman J.A. found that the offer made by the insurer prior to trial was an acknowledgment that the plaintiff's injuries would meet the threshold. He also noted that the insurer has an obligation to attempt to settle the claim as expeditiously as possible pursuant to s. 258.5(1) and failing to do so has the same consequences as s. 258.6(2) (Justice Feldman incorrectly identified the section in his decision as 258.5(2) when it should be 258.5(5)); the court shall take non-compliance with those sections into account when determining costs.

The Court of Appeal wrote that the legislature did not allow for any exceptions to the obligation including refusing to mediate because there is nothing to negotiate. It repudiated the idea of "playing hardball" by the insurer before first participating in serious settlement endeavours. There was a belief that attempting to settle the matter, even where hope of a settlement did not exist, can sometime still lead to a settlement or shorten the road to settlement. As such, the legislature put teeth into the provision by stating that costs would be the consequence of non-compliance.

Justice Feldman cited Morden J.A. in the McCombie v. Cadotte decision. "The failure to settle sooner results in increased costs; accordingly, the remedial penalty is to be incorporated in the costs order in the proceeding." Justice Feldman felt that the costs consequence of non-compliance had to be in addition to any costs consequence that was already covered in the rules, otherwise it would not be meaningful. As such, he ordered that costs payable to the plaintiff be increased by $40,000.00.

The effect of this decision is that insurers ought to attend the proposed mediation if it wants to avoid an increase in costs awarded against it at trial. The decision resembles a bad faith claim in that the court considered that the insurer refused to mediate based on its rejection of the plaintiff's injuries as being compensable and then made an offer for general damages (albeit low) just before the trial. The fact that the insurance company either changed its mind or was not truly committed to its view of the plaintiff's injuries seemed to be the factor that motivated the judge to increase the cost award. It leaves open the possibility that by attending the mediation, the insurer can then change its position on threshold prior to trial or simply put in an offer in order to attract a more favourable costs award, without the threat of any additional costs consequences from the court for not attending mediation. There was no explanation as to why $40,000.00 was appropriate in this instance.

I started this article by saying "you may recall" because how often is this section of the act ever invoked by a plaintiff or insurer? In the fourteen years that I have been practicing law, I have only received such a notice from plaintiff counsel once. Maybe it is because in the Ottawa jurisdiction, we continue to have court mandated mediation which essentially usurps the role of the requested mediation.

Mitch Kitagawa
Partner
Insurance Defence Group