The Approach of Canadian Courts to Bifurcation of Bad Faith Claims on First-Party Property Losses
By Havelock Madill
The trend as seen in the United States of insureds conjoining bad faith claims with suits arising from denial of first-party property losses is, perhaps not surprisingly, making its way into Canadian insurance practice and jurisprudence with increasing frequency. The Canadian courts are divided on whether the bad faith claims should be severed from and stayed pending the determination of the contractual dispute. Where bifurcation has occurred, it has been largely driven by the paramount concern for protecting legally privileged communications.
Canadian courts are generally reluctant to sever issues for preliminary determination other than in exceptional circumstances. As a rule, the issue to be tried first must have the potential to end the litigation. There must then be a compelling case made that the delay that will be experienced if the subsequent issue(s) needs to be determined is justified and is more than off-set by the expenses that may be avoided if it develops that the subsequent issue(s) does not need to proceed. As part of the latter concern, the court will be interested in whether the expense involved in determining the subsequent issue(s) at a later date will actually be greater than if all of the issues were determined at once.
Accordingly, for example, leave of the court to sever and stay quantum determinations pending a trial as to whether there is liability on the defendant’s part is rarely granted. While the courts appreciate that a favourable determination of liability for the defendant would end the litigation, thereby making the time and expense of trying quantum unnecessary, the possibility that liability will be determined in favour of the plaintiff and that quantum will therefore have to be addressed, is usually enough to militate against splitting the trial of the two issues.
Similarly, while there are certainly instances in Canadian jurisprudence where the courts have allowed the preliminary determination of whether an action is barred by the tolling of a limitation period (as the determination could end the litigation), the more common approach is not to do so.
A leading authority on severance applications is the judgment of the Ontario Court of Appeal in Elcano Acceptance v. Richmond, Richmond, Stambler & Mills (1986), 55 O.R. (2d) 56. This was an action for professional negligence against a law firm. At trial, the trial judge decided to split the trial and deal with the liability issue only. In reversing the decision, the appellate court laid down the general principle that it is a “basic right” of a litigant to have all issues in dispute in a case to be tried in one trial, and that a split trial should be ordered only “in the clearest of cases.” As far as possible, multiplicity of legal proceedings is to be avoided.
The Alberta Court of Appeal expressed a similar sentiment in Esso Resources Canada Ltd.
v. Stearns Catalytic Ltd. (1991), 114 A.R. 27, stating that the determination of preliminary issues should be reserved for exceptional cases. In the mind of the appellate court, what constitutes an exceptional case is if trying the suggested preliminary issue would reduce the total time and money spent on the litigation, and if the determination would end this lawsuit, or at least would if decided one way. Even then, the court reserves its discretion to direct that all issues be tried together.
Bad faith claims
Where a bad faith claims has been conjoined with an insurance contractual claim, there are two features that can be used to support bifurcating the two claims that are not present in other situations where severance is being sought. First, unlike those scenarios where the issue involved is merely part of the main action (for example, liability or limitation issues), the severing of the insurance contractual claim for initial determination will result in a judgment for or against the insured. If the determination is against the insured, then the action ends there and there is no need to consider the bad faith claim.
On the other hand, if the determination of the contractual claim is favourable to the insured, then the insured will have been made whole in respect to its loss, and what remains is a determination of whether it is entitled to punitive or exemplary damages arising from the insurer’s conduct in respect to the handling of the contractual claim.
The second distinguishing feature generally involved in this sort of case that is not present in other situations where severance is being sought is the possibility that the insurer may be required to waive legal privilege in order to defend itself with respect to the bad faith claim. If the insurer would not have been required to waive legal privilege over communications but for the existence of the bad faith claim, then the insurer will have been prejudiced by the bad faith claim being conjoined with the contractual claim.
Consider this situation further. Where the impugned conduct of the insurer occurred at a time when litigation was contemplated and/or the insurer was seeking legal advice with respect to the course it should steer in respect to the first-party property loss, the insurer will likely be required to divulge communications and/or work produce to defend itself in respect to the allegations. As the insurer would not have to do so in the ordinary course of defending the contractual claim, the insured gains an advantage by having access to information that it would not otherwise have but for the bad faith allegations.
It is likely fair to suggest that some bad faith claims are motivated more by the desire to access such information than by any real hope that a case for bad faith can be made out. The allegations allow the insured an opportunity to gain insight into the strengths and weaknesses of the insurer’s position by becoming privy to legal opinions and other communications that would be protected from required disclosure in the defence of the contractual claim but are relevant to the bad faith claim, and therefore open to examination by the insured.
Moreover, and possibly equally damaging, the insurer’s legal counsel may be required to be a witness in the proceedings in respect to the bad faith claims. In such circumstances, the Professional Codes of Conduct in most, if not all, of the Canadian provinces would require that the legal counsel step down from their representation of the insurer. This, too, can be the primary purpose of the insured’s bad faith allegations.
Legal privilege and right to counsel
The importance of being able to maintain solicitor-client privilege is reflected in the judgment of the Supreme Court of Canada in R. v. McLure  1 S.C.R. 455: “This appeal revisits the reach of solicitor-client privilege. This privilege comes with a long history. Its value has been tested since early in the common law. Its importance has not been diminished.
Solicitor-client privilege describes the privilege that exists between a client and his or her lawyer. This privilege is fundamental to the justice system in Canada. The law is a complex web of interests, relationships and rules. The integrity of the administration of justice depends upon the unique role of the solicitor who proves legal advice to clients within this complex system. At the heart of this privilege lies the concept that people must be able to speak candidly with their lawyers and so enable their interests to be fully represented.
“This sentiment ought not to disappear because an allegation of bad faith is advanced. “
In Davies v. American Home Assurance Co.,  O.J. No. 2696 at para. 17, the Ontario
Supreme Court of Justice Court stated: “The motions judge erred in concluding, as she did, that the mere assertion of a bad faith claim against an insurer is sufficient to destroy the solicitor-client privilege attaching to communications of legal opinions from the insurer’s counsel to the insurer. Such an intrusive undermining of a fundamental protective principle of substantive law cannot be justified on legal or policy grounds.
“The point is that litigation privilege (or solicitor-client privilege), when properly asserted trumps relevance in almost all circumstances. That is its very nature. There is no ‘bad faith insurance claim’ exception to either litigation privilege or solicitor-client privilege that creates a special rule for bad faith claims against insurers and consigns the normal rules respecting privilege to other claims. The same rules apply in all cases. “
Similarly, there are expressions by Canadian courts intended to indicate the significance to be attached to litigation privilege. In Moseley v. Spray Lakes Sawmills (1980) Ltd., (1996), 184 A.R. 101 at 21, the Alberta Court of Appeal considered the rational for litigation privilege.
“The rationale for litigation privilege provides an essential guide for determining the scope of its application. Its purpose is to protect from disclosure the statements and documents which are obtained or created particularly to prepare one’s case for litigation or anticipated litigation. It is intended to permit a party to freely investigate the facts at issue and determine the optimum manner in which to prepare and present the case for litigation.“
As for requiring that an insurer’s legal counsel step down from a case, this will not only likely delay the trial of the action, but it violates the insurer’s right to counsel of choice. Certainly, Alberta courts, for one, are reluctant to deprive clients of their chosen counsel. [See: Alberta Treasury Branches v. Leahy, (1998), 223 A.R. 113 (Alta. C.A.); Michel v. Lafrenz (1992), 6 Alta. L.R. (3d) (Alta C.A.); Downham v. Wawanesa Mutual Insurance, (2005), 23 C.C.L.I. (4) 33 (Alta. Q.B.)]
East vs. West
The practice of plaintiffs adding a bad faith claim whenever they are compelled to commence suit for the denial of a first-party property loss is a fairly recent phenomena in Canada. It likely finds its genesis in the earlier American experience.
The limited number of Canadian authorities on point are split with respect to whether there should be bifurcation of the bad faith and contractual claims. Interestingly, to date the difference in opinion has been geographically-based, with Western Canadian courts favouring the weight of U.S. decisions, which allow bifurcation, while courts in Eastern Canada have been less inclined to do so.
Starting with Western cases, concerns with respect to loss of legal privilege and right to counsel seems to have been at the heart of the British Columbia court’s decision in Wonderful Ventures v. Maylam  B.C. J. No. 1144. There, the insurer argued that defending the bad faith claim would require it to adduce evidence of legal advice it had received from its legal counsel, and that its legal counsel would have to resign from the file.
The court found that “…the prejudice to [the insurer] of having the contract claim and the bad faith claim tried together overrides any inconvenience, cost or expense which may be suffered by [the insured] as a result of … severing” the Amended Statement of Claim. As noted in R. v. McClure (supra) the protection of privileged communications is fundamental to the legal system and in my view should not be interfered with lightly.
Wonderful Ventures was considered in Lawrence v. Insurance Corp. of British Columbia  B.C.J. No. 2516 (B.C.S.C.). In Lawrence, the court ordered severance and a stay of document discovery relating to the bad faith allegations. In so doing, it gave deference to the protection of legal privilege, but it also pointed out that the matter could have an impact upon both the insured and the insurer (at paras. 32, 36-37).
“In this present case, there would be a double edge to the sword that pierces the shield of privilege. From the defendant’s perspective it would, as in Whiten v. Pilot Insurance Co. (1999), 42 O.R. (3d) 641 (Ont. C.A.), involve those who advised the defendant to testify about the nature of the advice given to the defendant in the period following their involvement in November 2000. From the plaintiff’s perspective, it may also involve plaintiff’s counsel testifying about the nature of what appears to be extensive discussions between himself and the defendant’s counsel.
“In my view, there is merit to the submission of prejudice if these claims remained joined. This is because the respect of the concept of solicitor/client privilege is fundamental to the proper conduct of litigation. The disclosure of matters within solicitor/client privilege will unquestionably affect the nature of the action in this case.”
In Read v. Insurance Corp. of British Columbia, (2002) BCSC 1607 at paras. 21-23, the court considered an appeal from the interlocutory orders which raised the issue of when discovery is to take place in an insurance action when the plaintiff brings a claim under the insurance contract and also alleges bad faith on the part of the insurer. In severing the two claims and staying the discovery of documents related to the bad faith claim, the court stated: “If the plaintiff, at this stage, is allowed full discovery on the bad faith claim, it will inevitably lead to the disclosure of documents that are otherwise privileged in the defence of the insurance claim.
“Litigation privilege exists to protect from production a communication made or a documents created for the dominant purpose of assisting the client in litigation, actual or contemplated. There is no ‘bad faith insurance claim’ exception to litigation privilege that creates a special rule for bad faith claims against insurers. See: Davies v. American Home Assurance Co. (2002), 217 D.L.R. (4th) 157 (Ont. Div. Ct.). ICBC cannot be compelled to disclose documents that are relevant to the bad faith claim, if those documents are privileged in the defence of the insurance claim.
“To balance the competing interests the appropriate order is to sever the bad faith claim pursuant to Rule 5(6). The insurance claim shall be tried first. Pursuant to Rule 26(15) discovery of documents on the severed bad faith claim will be delayed until the conclusion of the insurance claim. ICBC cannot reset its Rule 18 application until the plaintiff has had discovery on the bad faith claim.
“This result is consistent with the decisions of this court in Wonderful Ventures Ltd. v. Maylam (2001), 91 B.C.L.R. (3d) 319 (B.C.S.C. [In Chambers]) and Lawrence v. Insurance Corp. of British Columbia (2001), 96 B.C.L.R. (3d) 375 (B.C.S.C.). It protects the plaintiff’s right to pursue its bad faith claim while preventing the disclosure of privileged communications until the insurance claim is determined.”
The same approach was taken in Stuart v. Manufactures Life Insurance Co., (2004), 10 C.C.L.I. (4th) 142 (B.C.S.C.) at paras. 19-21. In allowing severance of the bad faith claims, the court considered the jurisprudence outlined above and stated: “Frankly, it seems to me that once the post-litigation conduct of the defendant is raised in a claim for damages resulting from a breach of duty of good faith, logic suggests that the conduct of counsel and the advice of counsel will likely come to play by the defence.
“These cases, in my view, stand for the proposition that in balancing the prejudice considerable weight must be given to the very real danger that a breach of confidential communication between client and counsel could result if the case is continued to be tried as one. In the end result, in my view, these cases suggest that the plaintiff, perhaps unfortunately, has a considerable hill to climb to tip the prejudicial balance in his favour.”
Stevens v. Sun Life Assurance Co. of Canada, (2004), 9 C.C.L.I (4th) 245 (B.C.S.C.), followed these decisions in directing that the plaintiff’s contract claim be determined before the bad faith claim and staying the plaintiff’s rights of discovery on the bad faith claim until after the contract claim has been determined.
The only Alberta case that appears to have given judgment on this issue to date is Sovereign General Insurance Company v. Tanar Industries Ltd.,  3 W.W.R. 240 (Alta. Q.B.) In Sovereign, the plaintiff sought an order compelling answers and disclosure from an insurer, which the insurer maintained were privileged correspondence with its counsel. The court was referred to and considered the American cases with respect to bifurcation, and also noted the consideration of the American cases by Canadian courts. In particular, the court referred to the Ontario case of Sempecos v. State Farm Fire and Casualt, which disapproved of the American approach.
The Alberta court held that it preferred the approach adopted by the British Columbia courts in Lawrence and in Wonderful Ventures cited earlier. “…I am not inclined to breach solicitor-client or litigation privilege with respect to the contractual claim simply because [an opposing party] has also made an allegation of bad faith. The practice in the United States in these circumstances is to hive off the bad faith claim. The plaintiff cannot compel disclosure of the otherwise privileged results of the investigation until the coverage claim is determined (see discussion of American cases in Tsimiklis v. Halifax Insurance Co.,  N.S J. No. 416 S.C.T.D.) and in Samoila v. Prudential of America General Insurance Co.,  O.J. No. 2746 (S.C.J.)). This procedure recommends itself to me.”
A further Alberta court is presently deliberating on the issue in an action between Norex Petroleum Ltd. v. Chubb Insurance Company of Canada, where the insurer is seeking to sever and stay the bad faith claims pending a resolution of the insurance contractual claim. At the time of this writing, a determination is expected shortly.
Ontario and beyond
Ontario and Newfoundland appear to have taken a more conservative approach to the bifurcation of bad faith claims from contractual claims. However, while Ontario courts have been less inclined to order severance of such claims than British Columbia, they have acknowledged that on proper evidence, severance could occur.
The leading Ontario case appears to be Sempecos v. State Farm and Casualty Co., 
O.J. No. 4887, affirmed  O.J. No. 4498 (Ont. C.A.), where the court of first instance heard a pre-trial application for the production of the complete claims files of the insurer, including legal opinions of its solicitors and an application by the defendant insurer to sever the damages issues from the contractual claims.
Relying upon the general principle regarding severance laid down in its earlier decision in Elanco, supra, that it is a “basic right” of a litigant to have all issues in the dispute tried in one trial, the court dismissed the application. In so doing, the court considered the approach of the American cases which had favoured bifurcation as a means of protecting legal privilege and concluded that those cases had given too much deference to privilege to the point of creating unfairness for the plaintiff insureds.
“To me, the American decisional law in this area is suspect because it tends to elevate the principle of privileged communications to the level of an untouchable loadstar or a sacred cow and tilts the trial playing field against the plaintiffs unfairly: a per se rule against unified trial is, from my perspective, a dangerous idea and I hope its time has not come in Ontario or Canada.”
For its part, the Ontario Court of Appeal held: “What this court is being asked to do is change the severance provisions provided for in the Rules to require severance in every instance where there is a legitimate claim for punitive damages. It is not appropriate for this court to make such a per se rule.”
However, the court held that the insurer had not provided evidence that it in fact intended, or would be obliged, to waive privilege in respect of solicitor-client communications in order to defend the bad faith claim. The court left open the possibility of bifurcation as the dismissal of the appeal was made without prejudice to the insurer’s right to bring a further motion on “appropriate evidence”.
In Osborne v. Non-Marine Underwriter’s Lloyd’s London, (2003), 46 C.C.L.I. (3d) 157 (Ont. Master) at para. 24, the insurer sought a stay of the bad faith claim or a divided discovery. The court found that there was insufficient evidence to support the motion but allowed for the possibility of severance on proper evidence.
“At this stage I find that the defendant has not established sufficient grounds to warrant severance of the issues and accordingly dismiss the defendant’s motion. However, I am of the view that once all of the evidence is collected, at trial the playing field against the defendant may be unfairly tilted. Accordingly, the motion is dismissed without prejudice to the defendant’s right to sever the bad faith claim from the accident benefit claim before the trial judge. “
In Lundigran v. Non-Marine Underwriters, Lloyd’s, London,  N.J. No. 30 (Nfld. T.D.), the Newfoundland court dismissed a bifurcation application to sever the bad faith allegations made in conjunction with the action on the insurance policy but holding that there is a strong presumption that all issues should be tried together and severance should only occur in exceptional circumstances.
It should be noted that the Ontario appellate court in Sempecos was concerned with whether there should be an automatic bifurcation in circumstances where a bad faith claim has been conjoined with an insurance contractual claim. In determining that there is no “per se” rule for bifurcation in such circumstances, the court held that it is always a matter of discretion on a case-by-case basis whether to sever the two matters. Having found that the chambers judge had exercised his discretion based upon proper principles and the record before him, the appellate court was not prepared to intervene.
At the time the Sempecos case was determined, the Supreme Court of Canada had not as yet ruled in the case of Whiten v Pilot Insurance Co.,  S.C.J. No. 19 (S.C.C.) However, both the lower and appellate court in Sempecos recognized the importance of the Ontario Court of Appeal’s own determination in Whiten that the breach of an insurer’s obligation to act in good faith constituted an independent wrong, thereby setting up a claim for punitive damages, and making otherwise privileged communications, including solicitor-client communications, potentially relevant and admissible in such cases.
The courts in Sempecos nevertheless concluded that this significant development did not alter the law to date so as to make bifurcation automatic where a bad faith claim is advanced along with the contractual claim.
When the Supreme Court of Canada rendered its decision in Whiten, Justice Binnie, speaking for the majority, held that an insurer’s breach of its duty of good faith is independent of its breach of contractual duty to pay for the insured’s loss. While not necessarily an independent tort, the breach of the duty of good faith is “an actionable wrong” leading to the possibility of an award of punitive damages. He then cautioned that “where a trial judge is concerned that the claim for punitive damages may affect the fairness of the liability trial, bifurcation may be appropriate.”
While obviously not imposing a hard and fast rule that bifurcation should occur in all such cases, the caution would seem to constitute the unfairness that could result from bad faith claims, particularly the rendering of privileged communications relevant and admissible, as a significant factor to be taken into account when a court is exercising its discretion whether to sever the bad faith claim from the contractual claim. In so doing, the caution would seem to favour the deference given to the preservation of privilege by the American, British Columbia and Alberta decisions earlier cited herein.
Havelock (Hav) B. Madill, Q.C.is with Brownlee LLP in Edmonton. He can be reached at (780) 497-4898 or email@example.com.