A homeowner's costly defeat in a dispute with her insurer should serve as a warning to both plaintiffs and defendants about the risks of taking your case to trial, says Toronto insurance lawyer Rohan Haté.

The woman sued her insurer for $1 million in damages after it denied her claim for fire loss, but ended up on the hook for almost $500,000 in damages and legal costs after the trial judge found she had committed fraud in her claim and granted the insurer's counterclaim.

In a recent ruling — which is currently under appeal — the judge who handled the trial concluded that the plaintiff's conduct throughout the litigation justified a higher than normal costs award, ordering her to pay her insurer $290,000 on a substantial indemnity basis. That was in addition to the $208,000 in damages the judge had already awarded to the defendant for its successful counterclaim.

Managing litigation risks
Haté, a lawyer with McPhadden Samac Tuovi Haté LLP, says many plaintiffs dream of having their day in court without considering the potential downside.

"The risks of litigation are real, and a large part of a lawyer's job is to manage those risks," he says. "This case is a stark reminder of the consequences you could encounter if you don't behave reasonably. They knew the risks of going to trial after seven years, and they ended up facing the judge's wrath."

According to court documents, a 2014 kitchen fire in the woman's home caused smoke damage that rendered the property temporarily uninhabitable. Her insurer did not make any allegations of fraud concerning the fire, but took issue with allegedly false statements she made on her claim for additional living expenses, and denied the entire claim as a result.

Insurer counterclaims for reimbursement of benefits
In 2015, the homeowner sued the insurer for general, aggravated and special damages. The insurer responded with a counterclaim for the reimbursement of benefits it had already paid out to the policyholder. Following a 16-day trial that finally got underway in mid-2022, the judge sided with the insurer after finding the defendant had proved fraud on the part of the plaintiff.

While the homeowner suggested a costs award in the $50,000-$65,000 range was appropriate, the judge ultimately came much closer to the insurer's suggestion for a payment of $370,000, after factoring in taxes and disbursements. The judge reduced the insurer's claim to account for inadequacies in its investigation of the claim and excessive preparation on the part of its lawyers, settling on a final costs award of just under $290,000, including tax and disbursements.

In her decision on costs, the judge explained that an award on a substantial indemnity basis is only allowed in narrow circumstances, such as when the successful party obtains a better result than they offered to settle for, or to sanction the conduct of the losing party.

"The plaintiff perpetrated a fraud on the defendant, sued for $1M, and put the defendant through litigation for seven years, including a lengthy trial. That is conduct that should attract the sanction of costs on the higher scale," the decision reads.

According to Haté, offers to settle made by both sides in advance of the trial appeared to play a significant role in the judge's ruling on costs.

'Genuine effort at compromise'
In late 2019, the insurer offered to settle the case with a payment to the plaintiff of $1,000 – a proposal the judge characterized as "a genuine effort at compromise" that would have allowed the plaintiff to avoid the risk of a successful counterclaim. The offer remained open until its withdrawal five days before the trial's opening.

The homeowner, for her part, delivered an offer one month before the trial, asking for more than $450,000 plus interest and costs to settle.

"To be a genuine effort at compromise, there must be some realistic evidentiary basis for achieving a result at trial that is as good as, or better, than put forth in the offer," the judge wrote in her ruling, noting that the plaintiff failed to produce evidence to substantiate such an amount of damages.

"Plaintiffs and defendants have to be strategic and smart about making offers to settle," Haté says. "The lesson here is to make reasonable offers prior to trial. If your offers are not reasonable and you're not able to beat them, then you could have to face significant consequences in terms of costs."