First Presented at the CBA-OBA Professional Development Program: Fast Out of the Gate: An Insurance Law Primer
In your drafting of a Statement of Claim, consider whether there is sufficient evidence to support a finding of bad faith against the insurer. If an insured can prove bad faith against an insurer on a first party claim, the court may award punitive damages against the insurer. However, in our experience, insurers react to a claim for bad faith in a different manner than to a claim for other damages, so you will 'up the ante' if you plead bad faith.
PRACTICE TIP 1: plead bad faith only if you believe you can prove it. Don't hesitate to plead it if the facts are there, but consider the facts carefully before pleading bad faith.
The general rule, again in our experience, is that where an insurer made a reasonable decision based on the facts before it, and acted in a prompt and fair manner in the circumstances, punitive damages will not be awarded. However, it is useful to look at circumstances where punitive damages were in fact awarded.
The courts have awarded punitive damages where an insurer is seen to be taking advantage of the insured's vulnerabilities or poor financial circumstances to attempt to settle for less money. In Whiten v. Pilot Insurance Co., a family's home was destroyed by fire and the insurer refused coverage despite multiple reports and evidence from various parties that the fire was accidental.1 The insurer denied coverage on the basis that the fire was a result of arson by the family.
In reinstating the jury's award of $1 million dollars in punitive damages, the Supreme Court of Canada ("SCC") stated that the allegations of arson made by the insurer were unsustainable and made in bad faith.2 The Court also stated that the motivation behind the insurer denying the claim was to force the insured to agree to a settlement for less than her entitlement under her policy.3
Likewise, in Fernandes v. Penncorp Life Insurance Company, the plaintiff hurt his back and could not return to work.4 Despite medical opinions stating that the plaintiff could not return to work, Penncorp stopped paying his disability benefits.
The Ontario Court of Appeal did not interfere with the decision of the trial judge to award punitive damages. The trial judge found that the conduct of the insured constituted bad faith. He made this decision based on the fact that the insurer had denied the benefits for six years in order to delay payment to take advantage of the insured's economic vulnerability.5 Moreover, the claims advisor for the defendant took an adversarial approach and did not deal with the claim fairly and in a balanced way.6 As such, the insurer was deemed to have acted in bad faith and the plaintiff was awarded $200,000 in punitive damages.
Inadequate or Incomplete Investigation
The duty to act fairly extends to the manner in which the investigation of the claim is executed by the insurer. An inadequate or incomplete investigation conducted by the insurer could and has led to a finding of bad faith by the courts. Similarly, an insurer who withholds information or fails to consider information in rendering its decision on a claim can also be found to have conducted itself in bad faith. In both scenarios, this finding of bad faith by the court could lead to an award of punitive damages against the insurer.
In Kings Mutual Insurance Co. v. Ackermann, punitive damages in the amount of $55,000 were awarded to the insureds. In rendering its decision, the Nova Scotia Court of Appeal, upholding the decision of the jury to award punitive damages, found that Kings' conduct "offended its sense of decency "by withholding critical information from the adjuster, ignoring relevant evidence and "allowing the adjuster to present the results of his or her investigation in a partisan, biased and unobjective manner."7
Similarly, in Plester v. Wawanesa Mutual Insurance Co., bad faith conduct was found as a result of a poorly conducted investigation by the insurer into allegations of arson against the insured.8 In this case, the insureds submitted a claim for a fire that had occurred in their business and Wawanesa denied the claim on the basis that it suspected the fire was started by the insureds. In upholding the jury's decision on punitive damages, the Ontario Court of Appeal first noted that it did not consider the fact that the insurer waited seven months to disclose to the insured that their claim was denied, or that the insurer had proposed to settle the claim at fifty percent evidence of bad faith. With that said, the Court found that the follow-up investigation conducted by Wawanesa was not conclusive or complete and that the alleged case of arson against the insureds did not progress past a mere suspicion.9
Where Punitive Damages Were Not Awarded
The purpose of punitive damages is not to compensate the plaintiff for his or her loss, but to punish the defendant and deter future offending conduct.10 Consequently, punitive damages are reserved for exceptional cases, where the court has found that there has been "malicious, oppressive and high-handed misconduct that offends the court's sense of decency".11 This suggests that there is a high threshold that must be met for an award of punitive damages to be awarded.
An insurer has a duty and a right to investigate a claim thoroughly. It will, therefore, not be penalized by the court for taking the time necessary in order to carry out a sound investigation. A denial of a claim resulting from a thorough investigation that is later determined to be legitimate will not necessarily lead to a finding of bad faith.12 This was demonstrated in Fidler v Sun life Assurance Co. of Canada, where the SCC determined that the insurer did not act in bad faith in denying the insureds benefits as it was found that "its denial of benefits was the product of a real, albeit incorrect, doubt as to whether [the insured] was incapable of performing any work, as required under the terms of the policy.13
In Fidler, the SCC confirmed this high threshold to be met in order for an award of punitive damages to be granted.14 In this case, the insured was receiving long-term disability benefits that were subsequently terminated for a period of more than five years, with no medical evidence to support the termination except for video surveillance showing Ms. Fidler driving and shopping.
The trial judge found no bad faith on the part of the insurer, but awarded Ms. Fidler aggravated damages of $20,000 for mental distress resulting from Sun Life's breach of the group disability contract. The Court of Appeal for British Columbia upheld the award for mental damages and also awarded Ms. Fidler $100,000 in punitive damages for bad faith conduct by Sun Life.
The SCC found that since mental distress "was reasonably within the contemplation of the parties when they entered into the contract of disability insurance," the award for mental damages was correct.15 The Court reversed the Court of Appeal's decision on punitive damages, and in doing so, took into consideration that Sun Life had legitimate difficulty in ascertaining whether Ms. Fidler was actually disabled.16 Though the Court acknowledged that Sun Life's denial of Ms. Fidler's benefits for five years without any medical evidence was troubling, given their difficulty in ascertaining her disability, the Court found that it did not amount to bad faith.
1 Supra note 3, Whiten.
2 Ibid at para 1.
4 Ibid at para 70.
5 Ibid at para 28.
6 Ibid at para 77.
7 2010 NSCA 39 at para 46.
8 2006 CarswellOnt 3241.
9 Ibid, at para 99.
10 Supra note 14 at para 38.
11  2 S.C.R. 1130.
12 2006 SCC 30 at para 71 [Fidler].
13 Ibid at para 74.
15 Ibid at para 2.
16 Ibid at para 74.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.