Cost awards shouldn’t be profit centres for insurers: Rastin

By Tony Poland, LegalMatters Staff • Insurance company defendants may be awarded costs, in certain circumstances, if an injured plaintiff loses their case at trial.  

Losing in a civil trial is not as simple as it may appear, says Barrie-area litigator Steve Rastin. Many plaintiffs are actually awarded significant damages by juries, but still end up “losing” because of considerations unknown to the jury such as the deductible, collateral deductions and formal Offers to Settle, he says.  

In other words, sometimes juries think they are giving money to the plaintiff when the award actually results in the plaintiff being ordered to pay money to the other side, says Rastin, adding this can be a harsh reality.

A recent court decision may provide some relief however, as it held that cost awards in personal injury cases must be fair and reasonable and cost awards should not become “a profit-generating device for insurance companies,” he says.

Rastin, senior counsel at Rastin Gluckstein, points out that in Dorah v. Dyal, the trial judge cut insurer Aviva’s cost claim in half. He says he views the Dorah decision as a positive step in discouraging what has been a growing practice risk that has discouraged plaintiffs from taking their meritorious cases to trial.

‘Highlights the inherently unfair playing field’

“I commend the judge in this case for having the courage to say cost awards should not be allowed to become a profit centre,” he tells LegalMattersCanada.ca. “This case essentially highlights the inherently unfair playing field that personal injury claimants find themselves fighting on.”

In considering the costs endorsement application in Dorah v. Dyal, Justice Markus Koehnen said he had “serious concerns” about the billing rates the insurer claimed and adjusted the costs downward.

“The first adjustment arises because Aviva internal counsel did not record their time but only estimated it after the fact,” he wrote. “The second adjustment ensures that the cost award indemnifies Aviva for its actual costs and does not turn cost awards into a source of profit for them. 

Following the four-week jury trial, the plaintiff received an award totalling $652,521, the judgment states. However, when statutory deductibles were applied, the net award of damages plus prejudgment interest came to $191,228.65.

Because Aviva had offered to settle the case for $250,000 prior to the trial, the insurer was entitled to claim costs under Rule 49 of the Rules of Civil Procedure since its offer was more than the net damages the plaintiff received.

Intended to incentivize parties to settle

Rastin explained that Rule 49 is intended to incentivize parties to make reasonable offers to settle and imposes cost consequences on those who do not accept such offers.

Although the plaintiff argued against costs for the insurer, Justice Koehnen said it was justified.

“The defendant clearly obtained a result at trial that was superior to the result the plaintiffs obtained at trial,” he ruled. “To deprive the defendant of cost consequences under Rule 49 in those circumstances would undermine the policy objectives behind the Rule and would discourage defendants from making reasonable offers to settle.”

Rastin, who was not involved in the case but comments generally, says while Aviva may have been entitled to claim costs, he disagreed with how Aviva calculated them, calling it “a legal fiction.”

“It shows how difficult our system of justice has become for plaintiffs when a jury awards the plaintiff more than $650,000 but because of all the deductions the final recovery is reduced to less than $200,000,” he says. “If the insurer’s cost were allowed the plaintiff would have walked away with almost nothing.”

The judgment notes that Avia claimed “roughly the same number of hours that the plaintiffs spent during the relevant time period.”

‘Plaintiff lawyers typically work harder’

“I thought that was frankly unlikely,” says Rastin. “Plaintiff lawyers typically work harder because of the fact that the plaintiff has to build their case. There is more work to put into a plaintiff’s case in my opinion. There are more witnesses. You have to construct all aspects of the case rather than knock it down.”

The judge noted that while the insurer claimed costs of $178,803, it used in-house counsel, and it based its claim on ascribed hourly rates. The defendant also did not maintain time dockets.

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“What they did is guesstimated their hours and used hourly rates based on industry standards to come up with the total,” says Rastin. 

In the end, the court awarded the defendant costs of $75,288.36 including disbursements and HST, while finding the plaintiff was entitled to $97,211.53. 

Rastin says the case highlights a worrying trend as more insurance companies employ in-house counsel.

Fundamental sea change

“There has been a fundamental sea change from decades ago when independent lawyers would defend an insurance claim. It is my belief that the trend is for insurers to have their own legal department,” he says. “One of the reasons for this is to cut costs. Rather than paying a lawyer $300 or $400 an hour or more, you can have a lawyer on staff for, say, $150,000 a year and they become a fixed cost.”

An imbalance can occur in Rule 49 cases where the insurer is allowed to recover costs using industry outside counsel rates while only incurring fixed, salary expenses, says Rastin.

“It is only fair that the insurance company get its costs because that is what the rule states,” he says. “But you should not be allowed to request an award more than the cost to the insurance company for having staff counsel. If you are paying a lawyer $150,000 a year and they win a $200,000 cost award from one trial, the insurance company is actually making money off that cost award. The trial – where the insurer is defending against an injured plaintiff – has the potential to become a profit centre for the insurer.

Source to generate significant revenue

“Insurers would be further incentivized to try cases that perhaps should have been settled” Rastin adds. “Denying claimants would mean a trial and then potentially claiming costs back from the plaintiff. It could conceivably be another source to generate significant revenue for insurance companies. They already have enough profit-generating tools. This should not be another one.” 

The deck is already stacked against personal injury claimants, he says.

“Insurance companies make money when they take your premiums, they make money when they invest your premiums,” Rastin says. “There are many obstacles out there that result in motor vehicle plaintiffs in Ontario starting off in a hole. To allow the insurer to make a profit from denying claims would add further insult to injury. 

“There are people in this province who are walking away from cases that, in my opinion, are meritorious because they are afraid of the cost consequences.” 

Without checks and balances on cost awards, many legitimate personal injury claims may not be pursued to their fullest extent, he says.

“Plaintiff counsel already must think long and hard about the risk of going to trial. If you are an average person who has been injured in a car crash and can no longer work, going to trial and having to pay a large cost award can break you,” says Rastin. “I give Justice Koehnen credit and I believe what is implicit in this ruling is a recognition that that the field is already unfair. It will be interesting to see if other judges are prepared to follow this judgment.”