“High Stakes” Litigation

Brandiferri et al v. Wawanesa Mutual Insurance Company (2012) is an example of a long-running case that, in the end, resulted in a punitive damages award against the insurer. It highlights many issues, including proof of loss, the appraisal mechanism and allegation of fraud (which the court determined was unfounded).

In terms of the facts of the case, on August 8, 2000, a fire started in an attached garage of a dwelling located in Woodbridge, Ontario. The garage and its contents were destroyed. Heavy smoke penetrated the main dwelling. There was a single limit on the homeowner’s policy of $564,000. The insurer paid $479,029.42 prior to the trial.
The homeowner plaintiff was seeking additional payments and an award for punitive damages. The trial began 12-years after the loss and lasted 14-days. During the trial, the judge made two rulings on expert evidence to be given at the trial. The final judgment took 12-months to write and release.

This is a very lengthy decision that touches on many issues. It is worthy of a complete read, but several important points are noted in the judge’s decision.

The Dwelling

The insurer’s staff adjuster was experienced in handling property claims. He made immediate arrangements to secure the site using an experienced fire general contractor. Additional steps were taken to engage a fire contents restoration firm who removed soft furniture, clothing etc. from the house. A second firm removed some hard contents from the house.

The adjuster retained two contracting firms to inspect the building damage. Both firms were insurance restorators with experience in repairing fire-damaged buildings. Both had a “preferred” status with the insurer. The first contractor secured the property and estimated building damages to be $45,000. The second firm was closer to $83,000. This caused the insurer to review the initial scope of damage. This resulted in the first firm revising their repair price upward to about $69,000.

The insured’s had the choice of choosing which contracting firm to engage. They chose the firm with the higher initial pricing. A customer authorization was signed on Sept. 20, 2000. The trial judge ruled this authorization established a contract between the insured and the contracting firm.

Five months into the repairs the contractor increased their estimate to $249,000. Ten months post-loss, the price increased again to $352,500. Clearly, as repairs unfolded, substantially more damage to the dwelling was discovered.

During the repair process, the adjuster attended the scene many times to inspect further damages and to mediate disputes between the policyholder and contractor. Without doubt, the insured was intimately involved with every step of the repair process. The judge found that it was:

    “…entirely appropriate for the Brandiferri’s to monitor the work, and, where it was incomplete, to demand more work; it was entirely appropriate for them to demand the correction of deficient work…..
….in general terms, the Wawanesa adjuster, was sympathetic to the Brandiferri’s and approved changes to the (contractors) scope of work as necessary, although he eventually balked, especially regarding repairs that he saw as extras.”

The judge described the relationship between the adjuster and the insured as “typical of the to-and-fro that would occur on any construction project.”

The original contractor left the job site 15 ½ months after the fire. A deficiencies list was provided prior to this date in November 2001 and the firm felt the only outstanding matter was brickwork, which they indicated they would complete the following spring. The insured clearly did not agree with the contractor’s position.

Appraisal

At the 10-month mark, the adjuster spoke to the insurance broker and raised the prospect that the insurer would invoke appraisal to resolve the issues in dispute. The adjuster subsequently used the broker to communicate an “all-in” offer. It was refused.

A lawyer was retained by the insured 11 months after the fire. The adjuster wrote to the lawyer that if they could not resolve matters they would go to appraisal.  

The lawyer took the letter as a request to begin the appraisal process.  He responded by appointing an engineer as their appraiser. Within short order, however, a new lawyer took over carriage of the file and expressed the view that, “….Appraisal, at this point might not be the best way to address the issue of quality repair work, as opposed to value.”

Both sides backed away from the Appraisal process and normal litigation ensued, with Examination for Discoveries taking place in March 2004. It was at Discovery that plaintiff’s counsel proposed Appraisal as he felt that the damage issues had been narrowed down. He proposed postponing further Discoveries until the Appraisal process was concluded.

The insurer’s lawyer responded in writing that the insurer took the position that, “…your client is not entitled to an appraisal.” Plaintiff’s counsel requested a re-consideration, but was refused.

This is an important point because, at trial, the insurer took the position that the damage issues had to go to Appraisal pursuant to the terms and conditions of the Insurance Act.  However, in light of what took place, the trial judge found that the insurer, through its counsel, had “…waived its right to insist on an appraisal, in writing, and therefore cannot now insist that it is a condition precedent to the plaintiffs’ right to recovery in this action.”

Election to Repair

Statutory Condition #13 is an election the insurer can take to repair a property. Rarely is this condition invoked. In this case, the plaintiff lawyer argued that the manner in which the initial contractor was hired and the insurer’s conduct in how they managed the process was an implied election.  

The plaintiff lawyer raised some good arguments but the judge eventually ruled that the customer authorization signed by the insured and the contractor was a contract although the language did contemplate the insurer being involved with a direction to pay proceeds to the contractor.  

The insurer had built itself into a middle position by controlling the cash flow and having the adjuster involved in the reconstruction process, according to the judge. The contractor refused to work without the adjuster’s authorization. But the trial judge did not feel their conduct was sufficient to amount to an election under Statutory Condition #13.  

The judge ruled the insurer did become an agent of the insureds for the purpose of paying the initial contractor. The insureds had withdrawn their authorization to make the final payment to the contracting firm but the insurer concedes they moved forward with payment. In light of this, the trial judge ruled that if the insureds could not make full recovery from the contracting firm, the insurer was going to have to stand good for it.

The judge gave the insurer and contractor 30-days post judgment to sort out remaining issues.

Personal Property

There were a variety of issues on this front. The insured’s daughter catalogued much of the loss outlining at trial the process she followed with assistance from a public adjuster.  Reference was also made to the fact that some of the clothing that had been removed for cleaning had subsequently been destroyed in a fire at the cleaning contractor’s shop. And, the insurer had dropped the ball in not advising the insureds of this issue until 3-years later. Further commentary on this portion of the loss came from the trial judge’s views on the insurer’s strategy to “….cast doub
t on some of the (content) figures without offering alternative evidence.”

Eventually, the argument was raised that the insureds were only entitled to the actual cash value of the contents loss unless they had replaced the item. The plaintiff lawyer argued that a form of equitable estoppel had been created. The insured did not have the money to replace goods. It was pointed out that the insurer only dropped a counter-claim of $600,000 against the insureds on the eve of trial.

The judge found that in removing the insured’s content items from the home, the insurer had taken on the role of a bailee. The contractors who removed items were sub-bailees of the insurer. It was required of the insurer to return the goods directly to the insureds. This did not happen.  

The judge ruled on several interesting points:
1.    The insurer was responsible for the items destroyed in the cleaner’s fire. The judge used the insured’s replacement cost numbers but applied a 40% depreciation rate across the board. The insured had applied a 30% rate.
2.    The insured had rejected content items returned from a second firm.  The judge accepted their opinion and likewise applied an additional 10% of depreciation.
3.    Another batch of content items was returned to the insured on the eve of the trial. There was not adequate time for inspection.  The judge ordered the insured and insurer into appraisal to determine repair or replacement.

Fraud on the Proof of Loss

The first formal proof of loss was filed on August 31, 2001—over one year post-fire. It concluded with a claim totaling $623,137.99.  

There was considerable evidence at trial on how the insureds arrived at this claim. The insured’s daughter was the key person putting this document together. The plaintiff lawyer argued that….

    “….(the daughter), who put together the proofs of loss, did so systematically but not correctly and certainly not fraudulently.

The goods were largely available for inspection post-loss. The adjuster who gave evidence conceded in cross-examination, “….I don’t know if we were actually misled.”  The adjuster went on to agree that they had not rejected the proof of loss that was filed. 

Further concessions were made that the first time “fraud” was brought up by the insurer was in a counter-claim that the insurer made against their policyholder.  

This judgment outlines many of the precedent cases where an allegation of fraud is made against a policyholder. In his decision, the judge noted:
1.    A claim that might be seen as exaggerated is not automatically a fraud.  It might simply be an “opening for negotiations.”
2.    The amount claimed might be the opening salvo in negotiating how much an insured will get under the policy.
3.    There must be an intention to mislead or deceive.  
4.    There must be strong evidence to support a finding of fraud.
5.    Does the approach of the policyholder seem reasonable under the circumstances?

At trial, the insured’s daughter was intelligent, well-spoken and able to articulate what she did and why. Her testimony was credible and as described by the judge as being “plausible, sensible and reasonable.” She had an honest belief in the fairness of how she had evaluated and submitted her parent’s claim.  

The judge was very critical of the “…late breaking allegation of fraud.”  He found it “opportunistic” as the allegation first appeared in filing the Statement of Defence. He determined that no fraud had been committed.

Punitive and Aggravated Damages

The insurer owes the insured the duty of “utmost good faith” in their investigation, evaluation and settlement of any claim.  

The plaintiff lawyer sought $350,000 in punitive damages and another $50,000 for aggravated damages on the basis that:
1.    The insurer’s defence of fraud was revealed for the first time with the filing of their Statement of Defence.
2.    The insurer made a counter-claim of $600,000. The judge described this tactic as putting a gun to the head of the insured. The insurer withdrew their counter claim on the eve of trial.
3.    The insurer breached its duty to their insured by making a final building payment to their approved contractor.
4.    The insurer failed to advise the insured’s for three years that some of their goods had been destroyed in a fire at the storage facility
5.    This insurer was a repeat offender.

Lawyers for the insurer argued that there was evidence at trial that the original adjuster had “…acted fairly and promptly in the circumstances.”  

The trial judge focused his attention on the litigation strategy. Heavy attention was paid to the late breaking fraud allegation.  The judge found this to be “…a high stakes litigation strategy” that in his mind clearly failed.

The judge noted the insurer to be a repeat offender and fixed punitive damages at $100,000. He declined to award aggravated damages.  

Case Summary

A property adjuster in our profession for any length of time will face this type of loss situation. The claim issues in this loss are not unique. There are however, a few things to learn from this case.

1.    The proof of loss can be a difficult form to properly explain to insureds. Schedule of Loss forms usually accompany the form. It should be a sworn document. It is THE critical document in a property claim. The presentation of the sworn Proof of Loss represents the insured’s official claim. This demands that claims professionals not only treat receipt of the Proof of Loss seriously, but also demonstrate that the insured(s) knew exactly the process they should be following to complete the form.
2.    Be very careful of using the “F-word.” You are alleging a criminal act on the part of your insured. The burden of proof required to prove fraud is much higher than normal civil standard of the balance of probabilities. This burden is closer to that required by a criminal court – beyond a reasonable doubt.
3.    The appraisal mechanism is part of the Insurance Act for a reason. It is a cost-effective, timely method to settle damage and value matters in dispute.
4.    It was very interesting to see the trial judge order a portion of this case into the appraisal process to resolve quantum.
5.    The initial adjuster assigned to this loss had the right thought in mind when seeking to trigger the appraisal mechanism. But both sides backed away from the process when the insured’s lawyer suggested that the issue involved the “…quality of repair work, as opposed to value.”

Glenn Gibson, CIP, CLA, FCIAA, CFE, CFEI, CFII-c, is Chief Executive Officer, Crawford & Company Consulting (Canada).