A duty of good faith is foundational to nearly every contract of insurance, imposing on all parties a duty to act fairly and in good faith in their dealings with one another. In Whiten v. Pilot Insurance Co., the Supreme Court of Canada affirmed the reciprocal duty of good faith, a breach of which would constitute an "independent actionable wrong" compensable through the imposition of punitive damages.1 This good faith obligation was more recently affirmed in the case RBC General Insurance Co. v. Field.2
In RBC, the Ontario Superior Court of Justice provided that there is a doctrine of mutuality that dually imposes a duty on an insurer and an insured party to act in good faith when dealing with one another in the making and adjudication of a claim under a policy. The Court in RBC clarified that the mutuality arises from the reciprocal duty of an insured to act fairly, honestly, and in good faith when making a claim, and of an insurer to act fairly, honestly, and in good faith when adjusting that claim.
In Demetriou v. AIG Insurance Company of Canada ("Demetriou"), the plaintiff, Mr. Demetriou, inherited a ring with an appraisal value of $550,000.3 He insured the ring with the defendant insurer on an all-risk basis in the amount of $581,951. While the plaintiff was vacationing with his family in the Dominican Republic, he alleged that he was robbed at knifepoint. His ring, along with the gold chain on which it was strung, was stolen. The plaintiff reported the incident to the receptionist at the hotel where he was staying, as well as the local police, a tour operator representative, and other authorities, including the Toronto Police Services and Foreign Affairs Canada. To his detriment, neither of the above-mentioned authorities were of any assistance.
On August 4, 2015, nearly two (2) months after the occurrence of the theft incident, the plaintiff issued a claim to his insurer. As part of the claims adjudication process, the plaintiff submitted a proof of loss and participated in two (2) examinations under oath. On February 22, 2016, nearly six (6) months after the plaintiff issued his claim, the defendant insurer issued a notice to the plaintiff formally denying his claim on the basis that there was insufficient information to substantiate his claim. The plaintiff, shortly thereafter, brought a claim against his insurer.
Arguments &Analysis at the Motion for Summary Judgement
On the motion for summary judgement, counsel for the insurer argued that it was unnecessary for the insurer to plead fraud, citing a series of suspicious circumstances surrounding the loss of the ring, including the fact that Mr. Demetriou never told his wife about the ring in the first place.4 Counsel for the insurer further observed that Mr. Demetriou had in the year prior lost another valuable piece of jewelry and had recovered from another insurer. Furthermore, counsel for the insurer alleged that Mr. Demetriou had failed to fully cooperate with the claims investigation process by refusing to answer a series of questions during one of his examinations.5 In light of these seemingly suspicious circumstances, counsel for the insurer argued that the insurer was not prepared to pay the value of the claim unless Mr. Demetriou was better able to substantiate the loss he had incurred.
Counsel for Mr. Demetriou argued that his client did satisfy his best efforts to prove his claim, citing his client's timely disclosure of the theft incident to several foreign and local authorities and undergoing several examinations under oath. Counsel for Mr. Demetriou further submitted that the defendant insurer was barred from alleging fraud at that stage of the proceeding, since the insurer's representative confirmed at discoveries that they would not be relying on allegations of fraud and did not provide any particulars of fraud in their pleadings.
In his decision, Justice Gray was satisfied that Mr. Demetriou had sufficiently cooperated with the insurer's investigation into the alleged theft of the ring. Justice Gray was also satisfied that Mr. Demetriou and his counsel had developed and implemented a litigation strategy informed in part by the understanding that the insurer would not be alleging or pursuing allegations of fraud.
As a result, Justice Gray prohibited the insurer from alleging fraud at that late stage of the proceeding. Justice Gray proceeded to grant a summary judgement against the insurer without giving any consideration to suspicious circumstances as alleged by counsel for the insurer. The insurer was ultimately ordered to pay the value of the claim. Of note, Justice Gray awarded punitive damages as against the insurer for bad faith dealing, and awarded substantial indemnity costs.
Arguments &Analysis on Appeal
The Court of Appeal overturned the decision, ruling that Justice Gray ought to have allowed the insurer to amend its pleadings to include the denial of coverage on the basis of fraudulent behavior on the part of Mr. Demetriou.
The Court of Appeal relied on Rule 26.01 of the Rules of Civil Procedure, which provides that "...the Court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment". The Court of Appeal opined that there was no such prejudice in the matter before them.
The Court of Appeal further stated that Justice Gray had erred prohibiting the insurer from amending their pleading and subsequently excluded from his consideration the evidence that raised the credibility issue with respect to the insured's claim. The Court of Appeal determined that the credibility of the insured's claim remained at issue and subsequently required a trial.
The Court of Appeal ordered a trial, permitting the insurer to amend its pleading to include allegations of fraud on the part of the insured. The punitive damages award against the insurer was also overturned.
By and large, the adjudication of civil claims by Ontario courts tend to proceed "without surprises". For instance, as was the case on summary judgement, when fraudulent activity or circumstances are alleged, the litigation strategies and pleadings of all parties to the litigation ought to reflect that fact. The summary judgement provided that once a party expressly denies relying on an allegation of fraud, that that allegation would no longer be available to them.
On appeal, the Court of Appeal interpreted the Rules broadly and granted leave to amend a pleading "at any stage of an action", unless non-compensable prejudice would result. So, even if a party previously denies their reliance on allegations of fraud, that does not necessarily mean that such allegations are no longer available to them. As such, counsel should remain mindful of the future paths their matters may take and should opt to keep their litigation strategies flexible to account for such a change.
Read the full decision or read other Case Summaries for January:
- 2002 SCC 18.
- 016 ONSC 5584 at para 150.
- 2019 ONSC 627.
- See Hajgato v Gibraltar General Insurance Co (1984), 23 ACWS (2d) 557 and Shakur v Pilot Insurance Co (1990), 74 OR (2d) 673.
- Supra note 3 at para 42.
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