Litigation costs are on the rise in Canada, fuelling higher liability claim expenses and adding pressure to commercial insurance pricing. A new report commissioned by the Insurance Bureau of Canada (IBC) and produced by law firm Dentons finds that increasing legal action is a key factor behind the trend.
“In Canada, litigation funding remains largely unregulated and speculative,” says Liam McGuinty, Vice-President, Strategy at IBC. “Left unchecked, this could
impact Canada’s property and casualty commercial insurance market and potentially affect the cost of commercial insurance.”
Dentons examined emerging trends in legal practice across North America to identify the pressures currently facing commercial insurance claims. The report references estimates by the U.S. Chamber of Commerce, which pegs the cost of civil lawsuits at 2.1 per cent of U.S. GDP—the equivalent of US$3,600 per household.
Titled Emerging Trends in Canadian Commercial Liability Insurance Market, the report identifies three key legal and financial dynamics contributing to social inflation in the United States that are now gaining traction in the Canadian market.
In 2016 alone, the total cost of class action settlements in the U.S. reached US$429 billion—with US$250 billion (58 per cent) attributable to commercial and general liability exposure.
Rise in class actions
While Canada has not seen the same scale of impact as the United States, class actions have surged over the past decade. The report points to litigation targeting pharmaceutical companies in the context of the opioid crisis, as well as legal actions against manufacturers of PFAS—so-called “forever chemicals” that contaminate drinking water sources.
Dentons attributes this trend in part to the growing expertise of Canadian plaintiff-side lawyers. The report also notes that governments are channeling resources to address public health issues through class actions.
Compared to the United States, the threshold for certifying class actions in Canada is typically lower, contributing to a lower prevalence of mass tort litigation. However, recent legislative changes in Ontario have introduced a more rigorous analysis for class certification, potentially paving the way for more large-scale claims in that province.
Legal advertising fuels participation
Another factor influencing litigation growth is the widespread advertising that encourages individuals to join lawsuits. According to the Canadian Bar Association, legal advertising has skyrocketed over the past 30 years. Recent lawyer disciplinary decisions include lawyers facing citations for breaching the regulations relating to the advertising of legal services.
“Insurance consumers ultimately foot the bill for legal abuse,” says McGuinty. “It’s important to have a legal framework that addresses civil wrongs and provides remedies for individuals who have been harmed by the action of others.”
Third-party litigation funding under scrutiny
The report also calls attention to third-party litigation funding, a practice Dentons says has strayed from its original goal of enhancing access to justice. “It is now used as an investment tool that uses the court system to generate profit for large financial firms,” the report notes.
For nearly two centuries in Canadian common law, litigation funding was prohibited. Today, the practice is becoming increasingly common in arbitrations, insolvency proceedings, intellectual property disputes, construction disputes, business to business commercial disputes, and judgment enforcements.
As litigation funding firms charge interest and fees on the loan, plaintiffs become more motivated to seek greater amounts to offset the amount of the loan to be repaid to the lender. “This result is a cycle that puts gradual upward pressure on damages and awards sought in litigation,” write the authors.
Dentons points out that Canada has not experienced the same escalation in damage awards as the United States. The report predicts that so-called “nuclear verdicts” (awards over $10 million) and “thermonuclear verdicts” (over $100 million) are unlikely to become widespread in Canada within the next five years.
Bad faith damages remain low
Bad faith damages awarded against insurers in Canada also remain modest by comparison. The highest punitive damages awarded in a bad faith claim in Canada was $1.5 million, granted by the Ontario Court of Appeal in 2023 in Baker v. Blue Cross Life Insurance Company of Canada.
“In Canada, an insurer may be found to have acted in bad faith if they fail to provide a reason for denying a claim, they do not investigate a claim fully, they delay payments for no lawful reason, or they make false statements to the policyholder,” Dentons notes. “These claims are more difficult to establish in Canada.”
