The duty of good faith is the guiding principle of insurance litigation.
What is the Duty of Good Faith?
The duty of good faith is a fundamental principle of the common that parties to a contract must perform their contractual duties honestly and reasonably.1 In the insurance context, it is an implied obligation that the insurer and insured will deal with claims in good faith.2 Section 439 of the Insurance Act reiterates this implied principle by stating that "no person shall engage in any unfair or deceptive act or practice."3 In summary, the relationship between the insured and insurer is contractual in nature that requires the "utmost good faith" in all dealings between the parties.4
It is important to underline that the duty of good faith is distinct from a fiduciary duty. Unlike the fiduciary duty, the duty of good faith does not obligate the insurer to "treat the insured's interests as paramount", but rather to give as much consideration to the insured's interests as they do to their own.5
Who Owes whom this Duty?
The duty of good faith is a two-way street.
In the majority of cases, it is the insured alleging that the insurer breached their duty of good faith. Case law over the years has strongly stated that the insurer owes the insured a duty of good faith throughout the entire relationship. As emphasized in the Supreme Court case of Fidler v Sun Life Assurance Co. of Canada, the duty of good faith requires the insurer to investigate, assess and decide a claim in a manner that is consistent with good faith practices.6
Nevertheless, the insured is also obligated to act in good faith. While it is argued that there are many power imbalances favouring the insurer throughout the relationship, the insured also has opportunities to exert the same. For example, in the pre-contractual stage, the insured knows all of the variables that are relevant for the insurer to calculate the risk of the policy. By making misrepresentations or withholding information, the insured may be able to secure a favourable insurance policy. The duty of good faith serves to prevent this by placing a duty on the insured, to be honest, and forthright in disclosing facts that are material to the policy.7
Scope of the Insurer's Duty of Good Faith
The duty of good faith does not always require the insurer to be correct. As ruled in 702535 Ontario Inc v Non-Marine Underwriters, the mere denial of a claim is not itself a breach of the duty of good faith. 8 As long as the insurer's decision was based on reasonable interpretations, whether correct or not in the end, then there is no presumption of bad faith. What needs to be examined is if there was any bad faith conduct on the part of the insurer, which must be decided on a case-to-case basis.
Insurers are permitted to investigate when skeptical about insured claims, however, they must do so in a manner consistent with good faith. Further investigation into potential claims is permitted as long as the insurer is not willfully blind to substantiate their position and interests. 9 The insurer must also not delay a claim in hopes of achieving an economic advantage or increased bargaining power over the insured.
What Constitutes Bad Faith?
As stated, what constitutes a breach of the duty of good faith must be decided on a case-to-case basis. However, the following is a non-exhaustive list of actions that courts may determine as acts of bad faith:
- Denying claims without reason
- Delaying claims with no justification
- Failing to investigate a claim
- Offering substantially less compensation than the claim is worth
- Misrepresentations
Damages for Breach
An insurer breaching the duty of good faith can result in major repercussions. Aside from contractual damages, damages defined from the contract itself, insurers could face punitive, aggravated or Fidler damages.
Aggravated and punitive damages are supplementary damages that require an independent actionable wrong in order to be claimed. In Whiten v Pilot, the Supreme Court determined that a breach of the duty of good faith constitutes an independent actionable wrong.10 This independent actionable wrong is not directly related to any breach of contract and is a separate act that warrants its own compensation. Therefore, if an insurer is found to have breached the same, then they may be liable for damages beyond the scope of the contract.
Fidler damages are distinct in that they are mental distress damages that arise from a breach of "peace of mind" or any other psychological benefit that would bring mental distress upon breach. These psychological benefits must be within the reasonable contemplation of the parties at the formation of the policy.11 While rare, if found in breach, these damages can be significant and are in addition to all damages listed above.
A lawyer who practices good faith in all their matters is essential for insurance defence. If you are looking for an insurance litigator or have any questions, please contact Charlie Fuhr, lawyer at Devry Smith Frank LLP ('DSF'), at 416-446-3304 or at Charlie.Fuhr@devrylaw.ca.
This blog was co-authored by summer law student Jaimin Panesar.
"This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs."
Footnotes
1 Bhasin v Hrynew, 2014 SCC 71.
2 702535 Ontario Inc v Non-Marine Underwriters, [2000] CanLII 5684 (ON CA).
3 Insurance Act, R.S.O 1990 c I.8 at section 439.
4 Pucci v The Wawanesa Mutual Insurance Company, 2020 ONCA 265.
5 Usanovic v Penncorp Life Insurance Company, 2017 ONCA 395.
6 Fidler v Sun Life Assurance Co. of Canada, 2006 SCC 30.
7 Supra note 1.
8 Supra note 2.
9 Whiten v Pilot Insurance Co, 2002 SCC 18.
[10 Supra note 9.
11 Supra note 6.
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.
