Special costs may be awarded against the insurer in disability insurance litigation in response to a litigant’s personal and financial circumstances, even if there has been no reprehensible conduct or bad faith on the part of the insurer.
Tanious v The Empire Life Insurance Company, 2019 BCCA 329, per Dickson J.A.
Facts + Issues
The Respondent insured (Tanious) was diagnosed with multiple sclerosis and her physical, cognitive, and emotional health deteriorated. Tanious began using crystal meth in an attempt to improve her cognition and in January 2012 her employment was terminated.
She was covered by a group policy of disability insurance issued by the Appellant insurance company (Empire). From late December 2011 onwards, Tanious was unable to work due to anxiety and depression. She applied for long-term disability benefits under the group policy, however Empire rejected her claim.
Due to her condition, Tanious could not pursue a claim against Empire without counsel. She retained an experienced disability litigator pursuant to a contingency fee agreement to sue Empire. She did not plead that Empire acted in bad faith in rejecting her claim. The trial judge allowed Tanious’ claim for past and future long-term disability benefits.
Following the trial, Tanious sought solicitor-client costs. She relied on an affidavit sworn by her counsel which discussed various aspects of the litigation. The evidence of her counsel was that her fees under the contingency fee agreement were significantly less than her fees would have been had she been charged an hourly rate. The trial judge awarded special costs based on his view that in the particular circumstances of the case, such an award was warranted in the interests of justice.
Empire appealed on the following grounds:
- That the trial judge had erred in law and principle in awarding special costs absent bad faith or reprehensible conduct on the part of the insurer.
- That the trial judge erred in admitting and relying on the affidavit of insured’s counsel.
HELD: Appeal dismissed; special costs award upheld.
It was held that in British Columbia, party and party costs are the general rule absent litigation misconduct, but in exceptional cases special costs may be awarded for non-punitive purposes in the interests of justice. The Court held as follows:
- At para. 34 - 40:
 At common law, costs and disbursements incurred in civil proceedings were not recoverable. However, beginning in the late 13th century in England the court was empowered by statute to award them to a successful party. In British Columbia, the statutory right to recover costs has existed since the late 19th century and is currently conferred by Rule 14-1 of the Supreme Court Civil Rules. Under Rule 14-1(9), unless the court orders otherwise, costs in a proceeding must be awarded to the successful party: MacKenzie at paras. 29, 64; British Columbia (Minister of Forests) v. Okanagan Indian Band, 2003 SCC 71 (CanLII) at para. 19.
 The court’s power to order costs serves as a tool to further the efficient, fair and orderly administration of justice. The traditional purpose of a costs award is to indemnify the successful party to some degree for allowable expenses and services incurred in a civil proceeding. While the indemnification principle is a cornerstone of a costs award, in the ordinary course the costs regime provides only partial, not full, indemnity. The general objective is to reallocate some of the successful party’s litigation costs to the loser, not to make the successful party whole. Without more, a discrepancy between actual costs and a costs award does not amount to an injustice or contravene the principle of indemnification: Okanagan Indian Band at paras. 20–21; MacKenzie at para. 81; Asselstine at paras. 4–6.
 Costs awards also serve other purposes and objectives. For example, they may encourage settlement, deter frivolous actions or defences and sanction unreasonable conduct committed in the course of litigation. In addition, on occasion costs may be awarded to enhance access to justice, mitigate severe inequality between litigants and encourage socially desirable conduct. In other words, costs awards may be used as an instrument of policy to accomplish purposes and objectives the law seeks to foster and promote: Okanagan Indian Band at paras. 20–31; MacKenzie at para. 83; 1465778 Ontario Inc. v. 1122077 Ontario Ltd. (2006), 2006 CanLII 35819 (ON CA), 82 O.R. (3d) 757 (C.A.); Furtney v. Furtney, 2014 ONSC 3774 (CanLII) at para. 33.
 Considerations of access to justice and levelling the playing field between litigants feature most commonly in costs awards made in public interest litigation, such as advance cost awards, special costs and protective costs orders. However, such considerations may also arise in the private litigation context. In 1465778 Ontario Inc., the Court affirmed that the list of purposes of costs awards includes access to justice and concluded that party and party costs may be awarded in private law litigation conducted pro bono to promote access to justice by enabling and encouraging more lawyers to work pro bono in deserving cases. Justice Feldman explained that the principles which guide the court’s discretion in awarding costs for access to justice purposes should be developed on a case-by-case basis, that levelling the playing field does not require that all litigants be placed in equal positions in every case and that the objective of facilitating access to justice “may be of sufficient importance to warrant placing the pro bono litigant in a more favourable position in some cases”: paras. 35, 42, 45–48.
 In recent years, the importance of facilitating access to justice as a policy objective of the law has come into particularly sharp focus in Canada. In Hryniak v. Mauldin, 2014 SCC 7 (CanLII), Justice Karakatsanis put it this way when interpreting summary judgment rules:
 Ensuring access to justice is the greatest challenge to the rule of law in Canada today. Trials have become increasingly expensive and protracted. Most Canadians cannot afford to sue when they are wronged or defend themselves when they are sued, and cannot afford to go to trial. Without an effective and accessible means of enforcing rights, the rule of law is threatened. Without public adjudication of civil claims, the development of the common law is stunted.
 On occasion, as in this case, courts are asked to develop the law of costs to accomplish its purposes and objectives more fully and effectively. As discussed in Fidler, where it is apparent that the reasons of principle and policy for general rules do not apply, the law may evolve without resiling from the general rule: paras. 37–39. Nevertheless, while some incremental development may be appropriate, whether the Court develops or merely applies the law of costs it is important to recall that costs awards should be predictable and consistent across similar cases. As Justice Goepel stated in Smithies Holdings, judges should be able to exercise their discretion “in like cases in a like manner”: para. 134.
 Moreover, costs considerations guide counsel and litigants in their choices and litigation strategies. For this reason, exposure to costs generally depends on the nature of the case itself and the parties’ litigation conduct, not on the parties’ individual characteristics and circumstances or their pre-litigation conduct: MacKenzie at paras. 81–91; Smithie Holdings at para. 134. In Houweling Nurseries Ltd. v. Fisons Western Corp. (1988), 1988 CanLII 186 (BC CA), 37 B.C.L.R. (2d) 2 at 25 (C.A.), leave to appeal ref’d  S.C.C.A No. 200, Justice McLachlin, as she then was, explained that “[p]arties, in calculating the risks of proceeding with the particular action or defence, should be able to forecast with some degree of precision what penalty they face should they be unsuccessful.”
- Costs awards may be used as a policy instrument to accomplish certain purposes. Concerns of access to justice and levelling the playing field between litigants may arise in the private litigation context.
- Special costs are not a substitute for damages. Special costs address the results and conduct of the parties during litigation and are generally awarded when there has been reprehensible conduct:
 Importantly, special costs are not a substitute for damages. They are not a remedy for a breach of contract, a means of shoring up a damages award or a means of ensuring that a successful party is not put to any expense whatsoever. Nor should special costs be conflated with damages for mental distress, punitive damages or contractual costs. To the extent that special costs were awarded on any of those bases in Wright or the other category (b) cases the judge mentioned in his reasons, in my view they are no longer good law: Hunt v. TD Securities Inc. (2003), 2003 CanLII 3649 (ON CA), 229 D.L.R. (4th) 609 (O.N.C.A.) at paras. 124–127; Marchen v. Dams Ford Lincoln Sales Ltd., 2010 BCCA 29 (CanLII) at para. 69; Canadian Petcetera Limited Partnership v. 2876 R Holdings Ltd., 2010 BCCA 469 (CanLII) at para. 42. In addition, as discussed further below, in this province the category (a) duty to defend cases the judge mentioned do not reflect the current state of the law: West Van Holdings at para. 109.
 As explained in Fidler, because a disability insurance contract is a “peace of mind” contract mental distress damages flow directly from its breach as a reasonably foreseeable consequence. In other words, when mental distress damages are awarded they represent an application of the principle in Hadley v. Baxendale and compensate the plaintiff for the loss of the promised mental security. Punitive damages, on the other hand, are not compensatory; they address the objectives of retribution, deterrence and denunciation. In a breach of contract case, they flow out of egregious misconduct committed by the defendant when the breach was committed, which misconduct must be independently actionable. If the breach in question was a denial of insurance benefits, a breach of the duty to act in good faith meets this requirement, but inadequate handling of the claim falling short of bad faith does not: Marchen at para. 67; Fidler at paras. 61–75; Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanLII). As for contractual costs, in entering into a contract parties may agree that one party will reimburse the other for actual legal fees and other expenses incurred in certain circumstances. When those circumstances arise, entitlement to recovery of legal fees and expenses is derived from the terms of the contract, not from the statutory costs regime: Canadian Petcetera at para. 42.
 In contrast, special costs serve different functions. They address the results and conduct of the parties in the course of litigation and are generally awarded where there has been some form of reprehensible conduct: Young v. Young, 1993 CanLII 34 (SCC),  4 S.C.R. 3 at 134–135; Marchen at para. 69. In these circumstances, their purpose is to censure and deter litigation misconduct, not to compensate the plaintiff. Pre-litigation misconduct is not to be considered in determining whether special costs should be awarded for purposes of censure because there are other suitable mechanisms of censure that apply: Smithies Holdings at para. 134.
- Rarely, it may be unjust to apply ordinary costs rules even if the losing party has not been guilty of litigation misconduct. Such an exercise of discretion must be justified by some unusual feature beyond a large discrepancy between taxable and actual legal costs, such as special importance, difficulty, or complexity:
 While the main purpose of special costs is to censure litigation misconduct, in exceptional circumstances they may be awarded for non-punitive purposes: Gichuru at para. 90. In my view, this is true, at least in part, because on rare occasions it may be unjust to apply ordinary costs rules and require a successful party to bear any part of the financial burden reasonably incurred in pursuing a claim even though the losing party committed no litigation misconduct. However, the exercise of discretion in making an extraordinary costs award must be justified by some unusual feature in the case beyond a large discrepancy between taxable and actual legal costs, such as special importance, difficulty or complexity associated with the litigation. As Justice Fitch emphasized in Briante, any departure from ordinary costs rules must be based on principle and not on sympathy for a litigant’s plight: para. 213; see also Asselstine at paras. 4–6; Rieta v. North American Air Travel Insurance Agents Ltd. (1998), 1998 CanLII 6540 (BC CA), 52 B.C.L.R. (3d) 114 at paras. 38–42, 49–50 (C.A.); Reilly v. Lynn, 2003 BCCA 49 (CanLII) at paras.143–145.
- Asselstine v Manufacturers Life Insurance Co, 2005 BCCA 465, 50 BCLR (4th) 11 affirms that the objectives of costs awards are generally enhanced when the personal and financial circumstances of litigants are not considered. However, it does not stand for the categorical proposition that a litigant’s personal and financial circumstances can never been relevant on a costs application.
- While insurance contracts have a special nature from which a term of good faith and fair dealing is implied, this does not justify a different costs regime that governs all insurance claimants: West Van Holdings Ltd v Economical Mutual Insurance Company, 2019 BCCA 110.
The Court held that the trial judge had not erred in admitting and relying on the evidence of insured’s counsel. The Court held as follows:
- The evidence was largely factual in nature. The trial judge identified the correct legal test for determining relevance in respect of factual issues and identified the factual issues to which the evidence linked: the unique aspects of disability insurance contracts in litigation generally and Tanious’ related personal and financial circumstances.
- The trial judge made no error in applying the test for admission of Tanious’ counsel’s evidence. Her counsel was highly knowledgeable regarding the factual issues in dispute.
- Tanious was required to provide an evidentiary basis for her special costs application. The trial judge was entitled to accept and rely on the proper content of her counsel’s evidence as proof of the facts on which she based her special costs application.
It was held that special costs awards should not necessarily be made in all successful disability insurance claims. Decisions on whether to award costs (and how to calculate them) are governed by a wide measure of discretion. The Court held as follows:
Not all disability insurance claims share the same characteristics and litigation challenges, complexities, and costs. Not all insured claimants experience the exigencies inherent in the litigation to the same degree.
Even in the categories of exceptional cases in which special costs are commonly awarded, they are not awarded automatically:
 As I have already noted, special costs awards are most commonly made in the absence of reprehensible conduct in public interest litigation. However, even in this context they are not awarded automatically. Bringing an issue of public importance to the courts does not necessarily entitle a litigant to preferential costs treatment. Where a party seeks to depart from ordinary costs rules in public interest litigation, the court will consider each case on its merits and weigh the consequences of the proposed costs award for each party involved: Little Sisters Book and Art Emporium v. Canada (Commissioner of Customs and Revenue), 2007 SCC 2 (CanLII) at para. 35; Carter v. Canada (Attorney General), 2015 SCC 5 (CanLII) at paras. 139–140.
The trial judge was held not to have erred in law or principle in awarding special costs in this case, nor was the award so clearly wrong as to amount to an injustice. The Court held as follows:
- The trial judge concluded that disability insurance claims are a uniquely challenging, complex, and costly type of contractual dispute litigation and that Tanious experienced these challenges, complexities, and costs to an extent that special costs were warranted in the interests of justice. There was an evidentiary basis for this conclusion and it was not unreasonable.
- Making an award for mental distress damages and a special costs award did not compensate Tanious twice for emotional harm. 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.
- The trial judge did not hold that a disability insurance policy grants a contractual right to full indemnity costs. He exercised his discretion to award special costs based on his assessment of the interests of justice in the circumstances, not a contractual obligation.
- The law of costs has evolved to a point where a judge may consider a litigant’s personal and financial challenges, 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. This enhances the policy objective of access to justice for disadvantaged litigants.
- If the interests of justice warrant it, a judge may depart from ordinary costs rules and award special costs absent reprehensible conduct. Because of the exceptional nature of this sort of claim the usual costs principle favouring partial indemnity may not apply.
- This development in the law of costs does not significantly compromise predictability and certainty. The unique nature of the contractual relationship and related dispute meant that disability insurers will likely be familiar with and consider the insured’s circumstances and the implications of denying benefits when assessing costs exposure.
- The prospect of a special costs award may encourage disability insurers to scrutinise claims extremely carefully at every stage of litigation. This may encourage settlement and avoid a cursory response that does not amount to bad faith but still negatively impacts access to justice for a disadvantaged litigant.
The law of costs in insurance litigation in British Columbia appears to be in flux. In West Van Holdings, the Court of Appeal, rejecting a number of decisions of the Supreme Court to the contrary, held that ordinary costs rules apply in duty to defend cases. The Court has subsequently described this as a significant change in the law of costs: Blue Mountain Log Sales Ltd v Lloyd’s Underwriters, 2019 BCCA 240 at para 62.
At the time West Van Holdings was decided, Tanious was still on reserve. The Court in Tanious indicated that West Van Holdings was largely consistent with the lower court decision in Tanious. It may be worth noting, however, that the Court in West Van Holdings clearly stated that special costs awards absent litigation misconduct undermine the goals of the costs regime:
The main purpose of special costs is to deter misconduct. If special costs are to be awarded regardless of conduct, there is no way to punish those unsuccessful parties who subject a successful party to an abusive proceeding. If a losing party faces full indemnity costs irrespective of their litigation conduct, the incentive for good conduct is correspondingly diminished. [at para 108]
It is questionable as to whether or not this decision will be followed in Alberta.