Bad faith in the insurance context occurs when an insurer acts contrary to its duty of good faith. The perception of what exactly is deemed to be appropriate conduct in the context of insurance claims continues to be refined by the courts. An insurer faces bad faith allegations by their insured in relation to claims handling and coverage decisions, exposing insurers not only to damages above policy limits, but to punitive and aggravated damages that have no direct relation to an insured's loss.
The duty of good faith requires an insurer to fairly investigate and assess an insured's claim and make coverage decision. An insurer must assess the merits of the claim in a "balanced and reasonable manner" and must not deny coverage or delay payment in order to "take advantage of the insured's economic vulnerability or to gain bargaining leverage in negotiating a settlement."1
Four decisions rendered in 2020 addressed various aspects of bad faith claims which insurers should be aware of, including: 1) when a claim for bad faith can be made; 2) the conduct of insurers which rises to the level of bad faith; 3) the scope of disclosure required by an insurer accused of bad faith; and 4) the availability of special costs against an unsuccessful insured.
Martens v. Manitoba Public Insurance Corporation, 2020 MBQB 158
On November 10, 2020, Justice Lanchbery of the Manitoba Court of Queen's Bench awarded approximately $350,000 in punitive and aggravated damages to an insured, in addition to a settlement payment, as a result of the insurer's breach of the duty of good faith for denying entitled benefits for a period of 9 years.
In 1998, the insured was involved in a significant motor vehicle accident. The insured received disability benefits and income replacement indemnity after the accident, but the insurer terminated its payments in 2003 after it received an anonymous tip that the insured was working and had failed to report it. The insured was charged with fraud and later acquitted in 2005. Despite the acquittal, the insurer continued to deny her benefits. The insured applied for a review of the insurer's decision in 2005, which was not settled in favour of the insured until 2012, when the insured received a settlement in the amount of $348,248.22 for the 9 years which the insurer improperly withheld her benefits. The insured then brought a separate law suit for bad faith against the insurer.
The evidence in the civil suit revealed that the insurer made decisions about the insured's entitlement to benefits without speaking to her to obtain her version of events, and in the absence of updated medical information from the insured's physicians. Moreover, internal documentation revealed that the insurer was aware of deficiencies in its reporting requirements and its failure to document critical interactions with the insured. However, rather than addressing these significant issues and offering a fair settlement to the insured, internal correspondence revealed that the insurers were looking for "wiggle room" and a "plausible plan" to deny coverage to the insured.
The court held that the actions of the insurer amounted to bad faith and explained that the particular actionable wrong in this case was the search for "wiggle room" and a "plausible plan" to deny the insured the benefits she was entitled, despite the court's decision acquitting the insured of fraud charges.
Sky Clean Energy Ltd. (Sky Solar (Canada) Ltd.) v. Economical Mutual Insurance Company, 2020 ONCA 558
On September 9, 2020, Chief Justice George R. Strathy of the Ontario Court of Appeal affirmed a lower court decision finding that an insurer did not breach the duty of good faith owed to the insured. In this case, Sky Clean Energy Ltd. ("Sky"), was a developer of solar energy products and was named as an additional insured under a commercial general liability policy. Sky was only covered under the policy to the extent of the liability arising from the operations of the principal insured, Sky's contractor.
On appeal, Sky argued that the insurer breached its duty of good faith by: (a) initially denying coverage without conducting a separate investigation; (b) interpreting the additional insured endorsement too narrowly; and (c) failing to follow its own claims procedures, as it did not appoint an adjuster or investigate Sky's losses. The court confirmed the trial judge's decision that: (a) the insurer's 13-day delay in acknowledging that Sky was an additional insured did not rise to the level of bad faith; (b) the trial judge did not interpret the additional insured endorsement too narrowly; and (c) the insurer did not act in bad faith by denying coverage without appointing an adjuster or investigating the claim.
Specifically, the Court of Appeal explained that, by the time Sky made a claim under the policy, the insurer knew that the transformers had been selected by Sky and that the contractor had not made this decision. As such, the court held that the insurer had an objectively reasonable basis on which to deny coverage and was not required to make further investigations. The Court of Appeal noted that the initial rejection of coverage "was perhaps precipitous" but was soon corrected and did not amount to bad faith.
Kanani v. Economical Insurance Company, 2020 ONSC 7201
On January 17, 2020 the Ontario Superior Court of Justice dismissed the insureds' motion to compel its insurer to produce notes and information regarding the insurer's reserves. The insureds brought a claim against the insurer alleging it breached its duty to act in good faith and brought motions seeking the disclosure of the insurer's internal notes, documents and reports pertaining to reserves.
The insureds argued that the insurer had sufficient information to determine that coverage should have been assessed and paid, and therefore production and review of the reserves would indicate exactly what the insurer considered with respect to the present and future benefits.
The court held found that the setting of reserve amounts was adequately removed from the process of adjustment and assessment of an insurance claim and was not relevant or material to any alleged bad faith by the insurer, which centered on claim and benefits assessment. The court explained that the fairness aspect of the duty of good faith relates to the manner in which the insurer conducts its dealings with the insured in investigating, assessing and responding to the insured's claim, and does not relate to the insurer's internal task of setting a reserve following its consideration of the risk as a whole. The court held that absent "exceptional circumstances", an insurer is not required to produce an internal estimation of its reserves in the face of a bad faith claim.
Pinder Estate v. Farmers Mutual Insurance Company, 2020 ONCA 413
On June 25, 2020, the Ontario Court of Appeal affirmed a lower court decision dismissing the insured's action against the insurer for bad faith in denying coverage, but allowed the appeal in relation to special costs awarded to the insurer. The insureds sued the insurer for a declaration of coverage under their home insurance policy after a fire destroyed their home, and brought a claim for bad faith against the insurer in handling and denying their claim. The insureds were unsuccessful at trial, and the insurer was awarded damages and substantial indemnity costs, finding that the insureds' allegations were unsubstantiated.
On appeal, the court explained that, while there are cases where substantial indemnity costs have been awarded where plaintiffs made "empty" or "unsubstantiated" bad faith allegations, typically there is specific conduct on the part of the unsuccessful party that extends beyond challenging the conduct of the insurer or presenting its case vigorously. Some examples noted by the court included serious allegations of bad faith publicized in the media, the use of intimidation tactics by exaggerating claims, and where claim had "no air of reality" and was based on fabricated testimony.
The Court of Appeal held that the trial judge erred in principle in awarding substantial indemnity costs, as the insureds' conduct did not reach the level of conduct deserving of that sanction. The conduct that the trial judge viewed as reprehensible with regards to witness credibility did not preclude the insureds from vigorously challenging the insurer's conduct in the context of their bad faith claims which were "not empty, baseless or entirely without foundation." The Court of Appeal ultimately reduced the costs award to the insurer.
KEY TAKE AWAYS
- A bad faith claim can be made against an insurer even after a settlement for coverage benefits has been reached. Ensure a fair and timely settlement. Take into account any potential mishandling when reaching a settlement amount in order to avoid bad faith claims. Ensure comprehensive drafted releases accompany any settlement agreement.
- Poor handling can be conduct which rises to the level of bad faith. Failure to conduct a reasonable or proper investigation, for example by drawing inappropriate fact conclusions, can be considered poor handling and result in a finding of bad faith.
- The scope of disclosure and production is broad for coverage issues and claims of bad faith in denying coverage. Typically the insurer's entire underwriting file is producible, along with its claims investigation file. The only way the court can ascertain whether the coverage investigation was handled improperly and in bad faith is by the production of the insurer's and broker's internal files showing how the claim was, or should have been, handled.
- Not every document in the insurer's file critical and relevant to a claim of bad faith. Insurers are not under a general obligation to produce information regarding reserves in actions centered on an insurance claim, even where bad faith is alleged. Instead, plaintiffs must plead specific allegations, supported by evidence, that the setting of reserves is relevant and material to the action. Insurers should take care not to reveal reserve information and to promptly retain coverage counsel to defend against claimants requesting reserve information.
- The failure of a plaintiff to prove a claim of breach of the duty of good faith against an insurer does not in itself justify an award of special costs. There must be a finding that the plaintiff engaged in reprehensible conduct which is deserving of sanction.
1. Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30 (S.C.C.) at para 63.
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.