How courts have lowered the bar for bad faith claims against insurers

A court finding of bad faith can damage a carrier’s reputation and harm its broker relationships, an industry lawyer warned Tuesday.

Of particular concern to carriers these days is the fact that the courts are lowering the bar for a finding of bad faith, according to Samantha Ip, chairwoman of Vancouver law firm Clark Wilson’s insurance group.

“That comes to the forefront of most insurers’ [minds] when they considering the possibility of denying cover,” Ip said Tuesday during Top Cases & Industry Developments in P&C Insurance, a webinar hosted by the Insurance Institute of British Columbia.

Two recent cases from the B.C. Supreme Court illustrate how the law on an insurer’s duty of good faith is evolving, Ip said. She was referring specifically to the 2011 ruling in Sidhu v. The Wawanesa Mutual Insurance Company and the 2012 ruling in McDonald v. The Insurance Corporation of British Columbia.

“From these decisions, the law is evolving to say, ‘You don’t have to be egregious,'” Ip said Tuesday. “You just have to be poor at handling — that can be bad faith.”

In Sidhu, the B.C. Supreme Court ruled against Wawanesa, finding that the insurer did not undertake its investigation or assess a claim in a fair or reasonable fashion. The case arose when Hardip Singh Sidhu and Santokh Singh Sidhu suffered fire damage to their home in 2005. Initially Wawanesa denied the claim, alleging that the Sidhus deliberately started the fire in order to recover the insurance money.

Canada’s “seminal” court decision on bad faith is the 2002 Supreme Court of Canada ruling in Whiten v. Pilot Insurance Co., said Erin Barnes, a Clark Wilson lawyer whose areas of expertise liability defence and coverage advice disputes. “This case was a great wakeup call for a lot of insurers,” he said. “It demonstrated the potential range of punitive damage that could be awarded against an insured, which in this case amounted to three times the policy limit.”

Pilot Insurance Company was sued by Daphne and Keith Whiten, whose Haliburton County, Ont., home was destroyed by fire in early 1994. Both the local fire chief and an engineer retained by Pilot said the fire was accidental. The adjuster initially assigned to the claim (and later taken off the claim) recommended to Pilot that the claim be paid. The Insurance Crime Prevention Bureau, which was asked by Pilot to investigate, also recommended the claim be paid.

In 1996, an Ontario trial jury awarded the Whitens $1 million in punitive damages, plus $227,500 plus interest for replacement of the structure and contents. The $1-million punitive damage award was reduced by the Court of Appeal of Ontario to $100,000 but then restored back to $1 million by the Supreme Court of Canada. Pilot argued, among other things, that an insurer is not required to accept the initial views of its investigators and is entitled to thoroughly investigate a claim.

Insurers risk damaging their reputation if they are found to be acting in bad faith, suggested Ip. Not only are they damaging their reputation, but in some cases they are also damaging their relationships with brokers.

Both the insurer and the client have an obligation to act in good faith towards each other, she observed.

“The insured relies on the insurer to provide coverage, and [you are] in a state of vulnerability if for example your house is burned down,” she said.

“The insurer relies on the insured for the truth of the facts on which coverage is decided,” she added.

So there is a mutual responsibility between the insured and insurer to act with reasonableness, fairness, honesty, and promptness.

Feature image via iStock.com/alexsl