Close, But No Bad Faith: The Fine Line Between Insurers Being Wrong And Acting In Bad Faith

For insurance professionals, making the correct decision on an insurance claim isn't just good business; it's protection against exposure. But when does a decision or a denial result in something more dangerous — a bad faith allegation?

Insurance companies owe a duty of good faith to their insureds. When an insurance claim is made, insurers must process, investigate, assess, and make decisions on coverage fairly, thoroughly, and promptly, even when the claim is ultimately denied.

Bad faith is, simply put, a breach of the duty of good faith. It is more than just being delayed or wrong; it is a serious and stigmatizing legal allegation that suggests that an insurer intentionally mishandled a claim, acted with improper motive, or made reckless and unreasonable decisions.

When coverage is denied in Manitoba, dissatisfied insureds have the right to commence a legal action against the insurer and claim for coverage or damages for breach of contract. Increasingly, these actions also contain allegations of bad faith.

It is important for insurance companies to know that when coverage claims are commenced, the privilege that ordinarily protects internal correspondence from disclosure may no longer apply.

Any internal correspondence that is relevant to the decision to deny coverage, such as emails, notes, reports, etc., may be producible in litigation. This is because the insurance company will need to justify its coverage decision by providing evidence of the decision-making process and its reasoning.

Making a decision on coverage that is ultimately determined to have been wrong or incorrect by a judge is not, on its own, an act of bad faith. There must be evidence of an ulterior or improper motive or reckless decision-making by the insurance company.

Bad faith is especially difficult for a plaintiff to prove in a court of law. There are two recent Manitoba decisions where plaintiffs sued insurance companies for coverage and made allegations of bad faith. In both cases, the Manitoba Court of Appeal discussed the applicable legal test for a finding of bad faith against an insurance company: whether the handling of a claim is "overwhelmingly inadequate."

Linde v. Max Insurance Company 2023, affirmed on appeal in 2025

The plaintiff lost her home in a fire in December 2019 and filed an insurance claim. The plaintiff's insurer assessed the value of the home and determined that it could be repaired for $248,000. The plaintiff was given the option to repair the home, or take the amount that would be paid out to her and she could undertake to rebuild the home on her own.

The plaintiff was dissatisfied with the handling of her claim and commenced a legal action claiming additional coverage and alleging bad faith. She argued that the following actions of the insurer amounted to bad faith:

• The initial meeting post-fire was too brief.
• The plaintiff was not informed of the repair quotes on a timely basis;
• The insurer did not consider rebuilding the plaintiff's home;
• The insurer only hired one expert to provide a repair estimate;
• The insurer did not pack out her personal contents to a storage facility;
• The plaintiff was not provided with any photographs of her damaged contents.

The Manitoba Court of King's Bench and the Manitoba Court of Appeal both agreed that the insurance company's actions did not rise to the threshold required to establish bad faith. The claim was dismissed at trial, and the appeal was also dismissed.

Martens v. MPIC 2020, reversed on appeal in 2021

The plaintiff was injured in a motor vehicle accident in 1998, and Manitoba Public Insurance Corporation (MPIC) provided the plaintiff with benefits under its Personal Injury Protection Plan (PIPP). The benefits included compensation for medical expenses and income replacement as the plaintiff could no longer work in the child care industry.

Years later, MPIC received a "confidential tip" that the plaintiff was working again, but not reporting income. Without discussing this information with the plaintiff or conducting an investigation, MPIC made a decision to cut off the plaintiff's PIPP benefits.

The plaintiff sued MPIC and alleged bad faith. MPIC's internal correspondence was necessarily disclosed and the following documentation was at the core of the bad faith allegation:

• A representative of MPIC asked another if they saw any "wiggle room" in cutting off the plaintiff's benefits;
• A representative of MPIC indicated that they "needed to come up with a plausible plan" to retire the plaintiff's file; and
• An internal email stated, "I think we have trouble" in reference to the plaintiff's disagreement with MPIC.

The trial judge found that the insurance company was "looking for a plan to deny plaintiff benefits instead of assisting her to obtain all compensation to which she was entitled."

However, MPIC appealed this decision, and the Manitoba Court of Appeal decided that the actions of MPIC may have contained errors and, in some cases, were inappropriate or unprofessional, but this conduct did not rise to the level of "overwhelmingly inadequate" in order to meet the legal test for bad faith.

Key Takeaways for Insurance Companies

Courts continue to uphold a high threshold for finding bad faith. While this is good news for insurers, it is important to be proactive when making coverage decisions. To avoid exposure to bad faith allegations:

• Ensure that every coverage decision is clearly explained and supported with evidence;
• Remember that being wrong does not amount to bad faith; and
• Assume that all of your written correspondence on a file will be disclosed to the insured and may be read by a judge.

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.