Canada: Practical Primer On The Dreaded World Of "Bad Faith" In The Insurance Industry

Last Updated: September 13 2018
Article by Douglas B. B. Stewart and Deepshikha Dutt

Bad faith defined

"Bad faith" generally has been defined by the Supreme Court of Canada ("SCC") as "conduct involving 'malicious intent' or that 'exceeds the limits of discretion reasonably exercised.'"1 In the insurance context, there appears to be a lack of concrete definition from the courts on what constitutes "bad faith". In McDonald v Insurance Corp of British Columbia2, the Court found that "bad faith is a term of convenience and does not carry a precise legal definition. A bad faith claim must be evaluated in light of the surrounding circumstances on a case-by-case basis: a closed category of defining attributes is neither possible nor desirable."3

In Canada, insurers are required to deal with an insured's claim fairly, both with respect to the manner in which it is investigated and assessed, and in the decision of whether or not to pay it.4

Key principles of bad faith

The key principles of bad faith articulated in Canadian case law include:

  • What constitutes bad faith will depend on the circumstances in each case.5;
  • Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.6;
  • The court will not find bad faith where the decision to deny coverage was reasonably supported by evidence and based on a reasonable interpretation of the policy.7;
  • Ignoring expert evidence can indicate insurer bad faith.8; and
  • The uncontested portion of a claim must be paid in a timely manner, and the insurance company cannot wait for resolution of the disputed portion.9

Bad faith: practical perspectives and case law going forward

Practical perspectives on bad faith

The key practical requirements for insurers to avoid claims of bad faith include reasonableness and fairness in denying coverage.

An insurer may be liable for identifying bad faith in the following examples:

  • Demonstrating arbitrariness in denying a claim and a failure to investigate relevant evidence to the claim;
  • Demanding supporting materials for a claim to which the insurer was not entitled;
  • Settling a claim without disclosing the terms of the coverage that had been misrepresented by the insurer when the policy had been acquired; or
  • Failing to pay the undisputed portion of a claim in a timely manner.

There will be likely no finding of bad faith when the insurer:

  • Failed to inform the insured about an applicable limitations period;
  • Denied coverage based on a reasonable interpretation of the policy and evidence;
  • Was delayed in advising the insured as to its decision on coverage because the insured was investigating the loss;
  • Offered to settle the claim for less than its stated value; or
  • Mounted a defense of arson or another criminal act of which the insured had been acquitted criminally, where there was a reasonable case for a different outcome on a civil standard of proof.

Generally, it is best practice for insurers to be proactive about preventing bad faith conduct by employees. This may be achieved through team-based inspections processes and internal checks and balances throughout the claims process.

Insurers should also always seek to mitigate potential harms as soon as bad faith conduct is discovered. Insurers should avoid covering up or ignoring bad faith conduct. Bad faith conduct that leads to economic benefit for insurers is likely to increase a punitive damages award. Adversarial tactics, such as applying economic pressure, is conduct considered worthy of punishment through punitive damages.

Bad faith going forward

Future Canadian courts may find decisions unreasonable and in bad faith if coverage is terminated in the absence of contradicting expert reports.10 In the context of more sophisticated claims, more leniency may be afforded for expert evidence requirements.11

Contra proferentum and Bhasin v Hrynew

Contra proferentum, dictates that where a term is ambiguous, the preferred meaning should be the one that works against the interests of the party who provided the vague term. Insurers should keep the doctrine of contra proferentum in mind during the drafting stage of insurance contracts and when considering the claims. In other words, "whoever holds the pen creates the ambiguity and must live with the consequences."12

There exists a general duty of honest performance of contractual obligations in Canada. In the 2014 decision of Bhasin v Hrynew13, the SCC held that parties must act in good faith when fulfilling their contractual obligations. Insurers should consider this obligation when fulfilling the terms of their contractual agreements.

Footnote

1 Noël v Société d'énergie de la Baie James, 2001 SCC 39 at para 52, [2001] 2 SCR 207.

2 2012 BCSC 283, 2012 CarswellBC 652.

3 Ibid at para 188.

4 Fidler v Sun Life Assurance Co of Canada, 2006 SCC 30, [2006] 2 SCR 3.

5 702535 Ontario Inc v Non-Marine Underwriters, 2000 Carswell Ont 904, 130 OAC 373. 

6 Palmer v Royal Insurance Co of Canada,1995 CarswellOnt 226, [1005] OJ No 82.

7 Ibid.

8 Whiten v Pilot Insurance Co, 20002 SCC 19, [2002] 1 SCR 595.

9 702535, supra note 5.

10 Fernandes v Penncorp, 2014 ONCA 615, 122 OR (3d) 192.

11 Gemeinhardt v Babic, 2016 ONSC 4707, 2016 CarswellOnt 11908.

12 Gibbens v Co-operators Life Insurance Co, 2009 SCC 59 at para 25, [2009] 3 SCR 605.

13 Bhasin v Hrynew, 2014 SCC 71, [2014] 3 SCR 494.]

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