BC Court of Appeal Upholds Special Costs Award Against Disability Insurer Despite No Litigation Misconduct

Reasons for judgment were published today by the BC Court of Appeal finding that trial judges do have authority to award special costs against litigants even in circumstances where no litigation misconduct occurred.

In today’s case (Tanious v. The Empire Life Insurance Company) the Plaintiff was insured with the Defendant.  She became disabled and sought long term disability benefits but the Defendant ‘rejected her claim’.  The Plaintiff successfully sued and was awarded damages along with an order of special costs.

The Defendant appealed arguing the judge was wrong in awarding special costs absent litigation misconduct.  The BC Court of Appeal disagreed and found that in “exceptional cases” such awards could be justified.  In upholding the award the court provided the following reasons:

[69]         To summarize, in British Columbia the general rule is that party and party costs are awarded to a successful litigant in the absence of litigation misconduct.  In ordinary litigation, this partial indemnity strikes a fair and proper balance of the costs burden to be borne by the winning and losing parties and enhances the policy objectives of predictability and consistency.  However, in exceptional cases special costs may be awarded for non-punitive purposes in the interests of justice to provide a higher degree of indemnification to the successful party.  When deciding whether to award special costs, a judge should exercise his or her discretion based on established principles and consider the nature and conduct of the litigation, bearing in mind the purposes and objectives of the costs regime, any salient policy considerations and the relevant facts as established by the evidence…

[77]         I am not persuaded that the judge erred in law or principle in exercising his discretion to award special costs in the circumstances of this case.  Nor, in my view, is the award so clearly wrong as to amount to an injustice.  The judge concluded that disability insurance claims are a uniquely challenging, complex and costly type of contractual dispute litigation and that Ms. Tanious experienced the challenges, complexities and costs inherent in such claims to an extent that special costs were warranted in the interests of justice.  There was an evidentiary basis for his conclusion, which, in my view, was not unreasonable.  Bearing in mind the privileged position he occupied and the high degree of appellate deference that applies, I would not interfere with the judge’s principled determination.  

[78]         I do not accept Empire Life’s submission that the judge compensated Ms. Tanious twice for the emotional harm its conduct caused by making both an award for mental distress damages and a special costs award.  The special costs award responded to the impact of the unique characteristics of the disability insurance contract in the litigation, not the emotional consequences of its breach.  Nor do I accept Empire Life’s submission that the judge erred by holding, in substance, that a disability insurance policy confers a contractual right to full indemnity costs.  On the contrary, he repeatedly stated that it did not. 

[79]         I am satisfied that, despite some ambiguity, when the reasons are read as a whole it is reasonably apparent that the judge exercised his discretion to award special costs based on his assessment of the interests of justice in all the circumstances of the case, not based on a contractual obligation.  His references to “contractual obligations” and the need to realize the “full benefit of the contract” must be read within the context of the entire decision. Had the judge relied on a contractual analysis in making the special costs award, I would agree with Empire Life that he erred in principle.  However, it seems to me that the “driving consideration” for the judge was the injustice he saw in permitting the unique challenges, complexities and costs inherent in disability insurance litigation to render an impoverished and disabled litigant’s pursuit of subsistence-level insurance benefits wholly impractical. 

[80]         In other words, while he did not express it in precisely these terms, at bottom, the judge’s concern with fulfilling the “intention of the insurance coverage” was the need he perceived to provide meaningful access to justice to Ms. Tanious in the unusual circumstances in which she found herself.  Importantly, that need arose in the context of a unique and distinct category of contractual dispute litigation, namely, a claim for subsistence-level disability insurance benefits, and not in the context of an “ordinary” insurance or personal harm claim.

[81]         As I have noted, the Supreme Court of Canada recently emphasized the importance of ensuring access to justice as a policy objective.  Long embedded within the law of costs, our understanding of the consequences of failing to achieve this objective has grown significantly in the last two decades, as the Report highlights.  In seeking to achieve justice in this case, the judge considered the merits of the case, weighed the consequences of a special costs award for both parties and decided it would be contrary to the interests of justice to ask Ms. Tanious (or her “low bono” counsel, Ms. Hayman) to bear the financial burden associated with pursuit of her claim: see Carter.  I see no error in his overall approach, which, in my view, was based on principle, not sympathy, and, given its narrow parameters, did not amount to judicial overreach.

[82]         As discussed, where reasons of principle and policy do not apply the law may evolve without resiling from a general rule by recognising policy-based exceptions: see Fidler; Hollander.  In my view, the law of costs has evolved to the point that a judge may consider a litigant’s challenging personal and financial circumstances, including the availability and nature of counsel’s services, in a disability insurance claim of this sort where there is an evidentiary basis for doing so and, if the interests of justice warrant it, may depart from ordinary costs rules and award special costs in the absence of reprehensible conduct.  The factors in question are linked to the exceptional nature of such a claim and, therefore, the usual costs principle favouring partial indemnity in ordinary litigation may not be applicable.  On the other hand, consideration of these factors in such cases enhances the policy objective of ensuring access to justice for disadvantaged litigants by, for example, encouraging more lawyers to act on deserving but otherwise unremunerative disability insurance claims.

[83]         Moreover, in my view, the policy objectives of predictability and consistency are not compromised by this incremental development in the law of costs, at least not significantly.  Given the unique nature of the particular contractual relationship in question and the related dispute, unlike many opposing litigants, disability insurers are likely to be familiar with an insured’s circumstances and the associated implications of denying benefits and to consider them when assessing their costs exposure.  Further, the prospect of facing a special costs award if a denial of benefits turns out to be unjustified may well encourage disability insurers to scrutinize claims extremely carefully at every stage of litigation, which, in turn, may encourage settlement and avoid the sort of cursory response seen here that falls short of bad faith but negatively impacts access to justice for a disadvantaged litigant.  On the other hand, if, on close and continuous examination, a defence appears strong and meritorious, the possible price of losing seems unlikely to keep a well-resourced disability insurer from the courtroom door: see Sidorksky.

[84]         In the final analysis, in my view, in balancing the parties’ interests in this unique litigation the judge did not err by concluding that it was just for the unsuccessful institutional defendant to indemnify the impoverished and disabled claimant fully for the reasonable costs of pursuing her claim for subsistence-level disability insurance benefits and, therefore, awarding special costs.