Refusal to Mediate Attracts a Remedial Penalty in Keam v. Caddey

The Ontario Court of Appeal has charted a practical middle ground for cases that do not meet the threshold for substantial indemnity but still warrant a significant cost award.  On August 30, 2010, the Court of Appeal unanimously decided in Keam v. Caddey, 2010 ONCA 565 to reprimand a litigating party for failure to participate in statutorily mandated mediation. The insurer for the defendant Caddey twice refused to participate in mediation, contrary to section 258.6(1) of the Ontario Insurance Act, R.S.O. 1990, c. I.8 on the ground that the appellants’ damages would not meet the statutory threshold under s. 267.5(5) of the Insurance Act that requires proof of “permanent serious disfigurement” or “permanent serious impairment of an important physical, mental or psychological function” in order to sustain a claim for non-pecuniary loss. However, following an eleven day trial, the plaintiffs and appellants Keam and Keam were successful in their suit against the defendant and respondents for serious damages suffered in a motor vehicle accident.

Interestingly, on the issue dealing with costs following trial, the trial judge declined appellants’ request for substantial indemnity costs despite the unwillingness of the defendants to attend mediation. The judge stated that the conduct of the respondents’ insurer was unsuccessful, not illegitimate, and that therefore their actions warranted no reprimand beyond partial indemnity.  

Although the Court of Appeal unanimously agreed with the trial judge that substantial indemnity was not warranted in this case, they went on to give a penalty against the defendant for failure to mediate.

The Duty to Mediate

The relevant statutory provisions considered by the Court of appeal when making its decision are subsections 258.6 (1) and (2) of the Insurance Act, which read as follows:

 258.6 (1)  A person making a claim for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of an automobile and an insurer that is defending an action in respect of the claim on behalf of an insured or that receives a notice under clause 258.3 (1) (b) in respect of the claim shall, on the request of either of them, participate in a mediation of the claim in accordance with the procedures prescribed by the regulations. [Emphasis added]  

258.6 (2) In an action in respect of the claim, a person’s failure to comply with this section shall be considered by the court in awarding costs. [Emphasis added]

It is the objective of these provisions that the Court of Appeal felt obliged to protect when it unanimously held that the trial judge erred in law by finding insurer’s failure to participate in mediation a viable position and by declining to impose a cost penalty on the insurer. Writing for the court, Feldman J. underlined the importance of pre-trial mediation when he listed the factors that impact on the magnitude of the costs penalty. Among others, the factors included:

(1)   The refusal to mediate;

(2)   The size of the ultimate recovery granted to the opposing party; and

(3)   The length of the trial

Notably, the Court of Appeal did agree with the trial judge that the insurer’s conduct did not warrant substantial indemnity. They referenced the threshold test set out by the Supreme Court of Canada in Young v. Young, [1993] 4 S.C.R. 3 for an award of substantial indemnity, namely, that a party’s conduct must be “reprehensible, scandalous or outrageous” to trigger such an award. The Court of Appeal did not feel that the insurer’s unwillingness to participate in mediation were up to this threshold. I agree with both the trial judge and the Court of Appeal in their judgment on this issue as the award of substantial indemnity is given only in exceptional circumstances. While both courts acknowledged that the insurer appeared to be playing hardball prior to trial, this conduct is nowhere near the definition of “reprehensible, scandalous or outrageous”. Although conduct like this may not be anyone’s idea of an ideal, it borders on the understandable given an adversarial process with a substantial amount of money in play.

Instead, the Court of Appeal rightfully directed its comments to the statutory duty to mediate stating that “[t]here can be no legitimate reason to refuse to participate because to elect not to participate constitutes a breach of the insurer’s statutory obligation. Accordingly, the Court concluded that despite a lack of malevolent conduct “a significant remedial penalty was required in all the circumstances.” To that effect, the Court ordered an increase of $40, 000 in the costs award. This brought the appellants’ recovery to $150, 000, up from $110, 000 representing partial indemnity costs ordered by the trial judge. This sum represents a middle ground between a partial indemnity award of $110,000 and the appellants’ substantial indemnity bill of $196, 145. This award allows the appellants to recover a significant amount of their costs and also reflects the court’s disapproval of the defendant’s actions without running the risk of opening the floodgates to a great increase in substantial indemnity claims.

I agree with the middle path taken by the Court of Appeal as parties to a dispute need to seriously consider mediation and potential for settlement prior to engaging in an expensive and time-consuming litigation process. If failure to observe statutorily mandated mediation – the goal of which is to reduce court dockets, protracted litigation processes, and expenses – does not attract censure from the court, parties to litigation cannot reasonably be expected to thoroughly consider the advantages of mediation. With an order of additional $40, 000 in costs for failure to mediate, the Court of Appeal should be commended for making it clear that mediation is not an option but a legitimate alternative to trial.