The Ontario Court of Appeal has affirmed a trial judge's decision to dismiss a class action against the Manufacturers Life Insurance Company (“Manulife”) on the basis that there was no cause of action for the plaintiffs' pure economic loss.
In Mandeville v. The Manufacturers Life Insurance Company, 2014 ONCA 417, the appeal court considered whether Manulife owed a novel duty of care to certain policyholders in connection with its decision to "demutualize" the company.
As a mutual insurance company, Manulife was governed by the Insurance Company’s Act (the “Act”). The Act required Manulife to obtain regulatory approval for the transfer (i.e., the demutualization) from the Canadian government. Because the “block of business” in issue was located in Barbados, Manulife also needed the approval of the Barbados government.
Approximately 8,000 residents of Barbados had participating policies with Manulife that were transferred to the Barbados Insurance Company. In demutualizing, Manulife converted from a mutual insurance company to a stock company. Because the class members policies had been transferred to the Barbados Insurance Company, they were no longer Manulife participating policyholders and therefore were ineligible to share in the value of the company.
The class action brought by the Barbados policyholders claimed that Manulife was negligent and breached its fiduciary duty that it owed to them. Their negligence claim was founded on the allegation that Manulife knew it was going to demutualize when it transferred its Barbados business and that it ought to have structured the transfer in a way that protected or preserved the class numbers’ rights to share in the value of Manulife on demutualization. They sought damages equal to the amount that the class members would have received had they been treated as eligible policyholders on demutualization.
After a 29 day common issues trial, Justice Newbould of the Ontario Superior Court concluded that while Manulife owed the Barbados policyholders a prima facie duty of care based on foreseeability of harm and proximity, for policy reasons, he refused to recognize that duty of care. Had he found Manulife liable, Justice Newbould would have ordered Manulife to pay damages of approximately $82 million, plus interest.
The class members advanced an alternative theory that claimed that Manulife should have compensated them for the loss of their “ownership rights” at the time of the transfer. Justice Newbould also rejected this theory, but determined that if liability had been established on that basis, he would have ordered Manulife to pay damages of $24.5 million, plus interest.
The class members appealed to the Court of Appeal. Manulife cross-appealed on the issue of damages. Justice Gillese writing for the Court of Appeal (Justices Blair and Strathy) held that the appeal and the cross-appeal should be dismissed.
In coming to the appeal court’s decision, Justice Gillese reviewed the key concepts in play about how a mutual insurance company was established and how it demutualized. She then set out a brief history of demutualization in Canada beginning in the late 1950’s when insurance companies in Canada became concerned about their vulnerability to hostile takeovers, the enactment by Parliament of amendments to the Canadian and British Insurance Companies Act (predecessor to the Act) to allow stock companies to mutualize and ending in the 1990’s when insurance companies began to see the advantages of converting back into stock companies.
In 1990, Manulife decided to sell its life insurance in the Caribbean – Atlantic region because the business was too small to operate effectively and its growth prospects were poor. Manulife eventually sold all of its business in the Caribbean, except for the business in Barbados. In Barbados, an insurance company required approval of the Supervisor of Insurance in order to transfer all or part of its business to another company. Justice Gillese explained in detail Manulife’s attempts to transfer its Barbados business. It was finally able to reach an agreement to do so in 1996. Manulife obtained regulatory approval to close the sale and transfer its Barbados policies from both the Canadian and Barbados regulators. Manulife’s demutualization became effective approximately 3 years later, in September of 1999.
In 2002, the proceeding was certified as a class action by Justice Nordheimer. Justice Nordheimer concluded that the regulatory approval given by Barbados Government did not automatically bar the Barbados policyholders from bringing the action.
Ten years after certification, the matter was brought to a common issues trial.
After reviewing the findings made by the trial judge, the Court of Appeal held that the appeal raised a single issue: Did the trial judge err in refusing to recognize that Manulife owed the class members a duty of care at the time of the transfer?
The Court held that the nature of the appellants’ claim was not straightforward in this case. Justice Gillese wrote that the question wasn’t whether the participating policyholders could be described as owners of a mutual insurance company. It was whether at the time of the transfer to the Barbados Insurance Company, whether the class members had a legally recognized right or interest in respect of a possible demutualization by Manulife. She held that they did not. At the time of the transfer in 1996, mutual companies like Manulife were not permitted to demutualize. That right only came into existence in 1999. The terms of the class members’ policies did not refer to any right to receive benefits on demutualization. In addition, there was no such right afforded by statute or regulation. Because Manulife had no right to demutualize in 1996, the appellants could have had no right to share in the benefits of demutualization.
Justice Gillese concluded that a hope or mere expectancy is not illegally enforceable right or interest.
In addition, the Court of Appeal held that the appellants’ claim was one for pure economic loss. Pure economic loss is loss suffered by an individual that is not accompanied by physical injury or property damage. Damages claimed by the appellants is equivalent to the benefits the class members would have received had they been treated as eligible policyholders upon Manulife’s demutualization. The damages are not causally connected to physical injury to their persons or physical damage to their property.
When a claim is made for pure economic loss, the Supreme Court of Canada in Martel Building Ltd. v. Canada, 2000 has held that such claims or require greater scrutiny when the court is deciding whether to recognize a duty of care. The Supreme Court of Canada in Martel set out the policy reasons underlying the common law's traditional reluctance to permit recovery for pure economic loss:
“First, economic interests are viewed as less compelling of protection than bodily security or proprietary interests. Secondly, unbridled recognition of economic loss raises the spectre of indeterminate liability. Third, economic losses often arise in a commercial context, where they are often an inherent business risk best guarded against by the party in whom they fall through such means as insurance. Finally, allowing the recovery of economic loss through tort has been seen to encourage a multiplicity of inappropriate law suits.
However, Canadian jurisprudence shows that there was no automatic bar to recovery for pure economic loss.
Justice Gillese utilized the test established in Anns v Merton Borough Council to determine whether a novel duty of care between a mutual insurance company and its participating policyholders should be recognized in the present case. Anns is a 2 stage test for determining whether a duty of care arises - i.e., 1) was the harm that occurred, the reasonably foreseeable consequence of the Defendant’s Act; and 2) are there reasons, notwithstanding the proximity between the parties that tort liability should not be recognized?
Applying the Anns test, the Court of Appeal agreed with Justice Newbould that the harm the class members suffered was a reasonably foreseeable consequence of Manulife’s transfer of their policies. However, the appeal judges disagreed that a prima facie duty of care had been established. They concluded that given the tenuous and inchoate nature of the interest that the policyholders sought to have protected, the proximity requirement had not been satisfied and a prima facie duty of care did not arise.
Having found no prima facie duty of care at the first stage of the Anns test, the Court held that it was unnecessary to continue the second stage and consider whether there were residual policy considerations that would negate the imposition of a new duty of care. Despite that finding, Justice Gillese held that there were two policy considerations that precluded a duty of care - the spectre of indeterminate liability and a multiplicity of inappropriate law suits.
The court dismissed the policyholders' appeal.
The court dismissed the policyholders' appeal.