BC Court of Appeal Decides (and Dismisses) its First Liability Insurance Bad Faith Case
On December 10, 2008, BC's Court of Appeal issued its first ever bad faith decision involving third party liability coverage. The case is curious because it alleged bad faith failure to accept a post-judgment settlement offer rather than the more usual pre-trial settlement offer.
The motor vehicle accident involving the infant plaintiff occurred in 1982. The trial of the personal injury action took place in March 1988. The insurer, ICBC, told the insured two months before the trial to obtain independent counsel because of the potential for the claim to exceed the one million dollar policy limits. Judgment eventually came down for 1.45 million dollars, so there was a substantial "excess" exposure on the part of the insured. The insured then assigned his cause of action against ICBC to the Plaintiff in exchange for an agreement not to take execution proceedings (the insured had no significant assets).
Initially, the resulting bad faith claim against ICBC was framed as a more traditional "failure to settle within limits" claim, including allegations of inadequate investigation and defence. It turns out the claims adjuster issued an opinion just before trial that there was "huge exposure" and one might think a bad faith failure to settle claim in such circumstances might have substance.
Strategic issues must have been in play, however, because the plaintiff eventually abandoned these bad faith allegations and limited the case to a summary trial respecting (1) ICBC's refusal to accept a post-judgment "structured" settlement offer (which would have reduced the excess judgment by some $80,000) and also (2) ICBC's refusal to pay for the insured's independent counsel necessitated by the potential for exposure beyond policy limits.
ICBC had refused a structured settlement following the tort judgment ostensibly because (a) the plaintiff was not offering a full release of the insured from any further liability and (b) structured settlements result in a form of contingent liability that an insurer was not obliged to incur. In essence, the bad faith claim was that ICBC had an opportunity to reduce the insured's exposure to the excess judgment by some $80,000 and that its good faith obligations obliged it to do so.
The Court of Appeal noted that a liability insurer's good faith duties respecting investigation, defence and settlement of the claim "typically arise before judgment" in the tort action and there was "no authority for the proposition that insurer's duty [of good faith] obliges it to accept a [post-judgment] settlement offer exposing it to a contingent liability in addition to the policy limit". ICBC, the Court said, was perfectly entitled to insist on its policy of accepting structured settlements (and the accompanying contingent liability) only where it could obtain for its insured a full release from liability. The Court agreed that there had not been a breach of any good faith obligation owed to the insured in the circumstances.
The Court of Appeal also agreed with an earlier BCSC ruling that there is "no possible basis" for imposing upon a liability insurer any obligation to provide and pay for independent legal advice for an insured in respect of potential exposure beyond policy limits. This one, narrow point has now being very firmly decided in BC.
There have been very few successful bad faith "refusal to settle" cases against insurers in Canada, although one BC trial court decision had actually imposed such liability in 1991 (Shea v. MPIC). The case involved in this bulletin, McGee v. ICBC, is the first time the BC Court of Appeal has had to consider the issue and the Court was evidently not impressed by any concept of "best available post-judgment settlement" obligations. Given the rarity of these cases, it may be a long time before the BC Court of Appeal is called upon to address the limitations of any pre-judgment obligation to settle.
Readers who would like to review the Reasons for Judgment in McGee v. ICBC, can do so at www.courts.gov.bc.ca/Jdb-txt/CA/08/05/2008BCCA0508.htm. A more comprehensive article on "insurance bad faith litigation" generally, including the good faith obligations in both third party liability and first party coverages, is available at www.cwilson.com/pubs/insurance/npk10.