An allegation of bad faith in insurance claims can result in a financial sanction above the policy limits as well as possible punitive and aggravated damages. The contractual relationship between the insurer and an insured is one of utmost good faith that imposes an obligation on the parties to deal with each other fairly. Bad faith dealings can arise when an insurer fails to fairly investigate, assess, or pay a claim in a balanced and reasonable manner. Several decisions in 2020 reviewed various aspects of bad faith claims which insurers and plaintiffs should take note of. These decisions address:
- The conduct by insurers that meets the threshold of bad faith;
- The nature of disclosure required of an insurer when faced with a bad faith claim; and
- When substantial indemnity costs may be warranted against an unsuccessful plaintiff.
What Type of Conduct by Insurers Meets the Threshold of Bad Faith?
In Sky Clean Energy Ltd. (Sky Solar (Canada) Ltd. v. Economical Mutual Insurance Company, the Ontario Court of Appeal affirmed a lower court finding that the insurer did not breach the duty of good faith. Sky developed solar energy products and was named as an additional insured under a policy with Economical, with Sky’s contractor the named insured. Sky was covered only to the extent of the liability arising from the operations of the principal insured. Sky specified the particular solar transformers that the contractor was to install, and a later fire caused by the electrical transformers damaged the project.
Sky alleged that Economical breached the duty of good faith by (a) denying coverage without conducting a separate investigation; (b) interpreting the additional insureds endorsement too narrowly, and (c) failing to follow its claims process by denying coverage without appointing an adjuster or conducting an investigation. The Court of Appeal disagreed, finding that when Sky made a claim under the policy Economical knew that Sky had selected the transformers and consequently there was no reason to continue to investigate as there was a reasonable basis on which to deny coverage.
What Disclosure is Required of an Insurer when Faced with a Bad Faith Claim?
In Kanani v. Economical Insurance Company, the Ontario Superior Court of Justice dismissed a motion seeking to compel the insurer to produce notes and information regarding the insurer’s reserves. The Plaintiffs alleged that Economical breached its duty to act in good faith and sought disclosure of the insurer’s internal documents.
The allegations of bad faith related to Economical’s assessment of present and future benefits including attendant care. The Plaintiffs alleged Economical had information to determine that coverage should have been paid, and that review of the reserve information would indicate how Economical assessed and adjusted the claim and what they considered regarding present and future benefits.
Justice Nadeau determined that the reserves did not relate to the process in which a claim is assessed; they are separate processes with distinct considerations, and except in unusual circumstances, the setting of reserve amounts will not be material to an allegation of bad faith. An insurer’s internal estimation of its financial exposure regarding risk will not usually be pertinent to the insurer’s conduct in responding to a claim. The Court also noted that disclosing the information would be highly prejudicial to Economical which would outweigh the limited probative value disclosure would bring.
When will Substantial Indemnity Costs be Warranted Against an Unsuccessful Plaintiff?
In Pinder Estate v. Farmers Mutual Insurance Company, a fire damaged the insured’s house. The Plaintiffs initiated an action against the insurer for a declaration of coverage under their home insurance policy, and alleged the insurer acted in bad faith in denying their claim. The insurer denied coverage on the grounds that the insureds failed to notify of a change in the house’s heating system which they claimed was a material change in risk, and also on the basis that the insureds wilfully made false statements regarding their claim. The insureds were unsuccessful at trial and the insurer was awarded damages and substantial indemnity costs.
On appeal, the insureds submitted the trial judge was in error in awarding substantial indemnity costs by failing to distinguish between zealous advocacy and true reprehensible conduct. The mere fact their claims were unsuccessful did not warrant the costs award. The Court reversed the original award of substantial indemnity costs concluding that the insured’s conduct did not warrant the sanction.
Though there are cases where substantial indemnity cases have been awarded by plaintiffs making empty or unsubstantiated bad faith allegations, usually there is some conduct by the unsuccessful party that goes beyond challenging the conduct of the insurer or presenting its case vigorously. Some examples included serious allegations of bad faith that were shared with the media, where a plaintiff tried to intimidate an insurer with exaggerated claims, and where an insured’s bad faith claim had no foundation and was based on fabricated testimony.
An Insurer Must Deal with an Insured’s Claim Fairly
The duty of fairness does not require that an insurer be correct in its decision, as the denial of a claim that ultimately succeeds is not necessarily an act of bad faith. But any decision to refuse payment should be based on a reasonable interpretation of the obligations under the insurance policy. An insurer must act fairly in investigating and assessing a claim, and failure to properly investigate and draw appropriate conclusions could lead to a finding of bad faith conduct.
The lawyers at Milosevic & Associates in Toronto are skilled at providing strategic litigation advice across complex commercial matters including insurance claims. Our team has extensive experience advocating for our clients’ rights. To learn how we can help you call us at 416-916-1387 or contact us online to schedule a consultation.