Property Loss Update (August 01, 2009)

As a loss adjuster, you do not have a second chance to do things right. Your performance on every file you handle has the potential to end up in a court of law. To stay out of trouble and deliver excellent service requires a daily commitment to embracing the right attitude. Your daily attitude requires a commitment to doing things consistently the right way. But, this choice has to also be combined with a personal commitment to your own training and education. These two combined are powerful forces that allow you to consider yourself truly a professional.

The foundation of winning a trial is evidence. The cases highlighted in these updates show how trials can swing in different directions.

Evidence

• Investigate.

• Evaluate.

• Negotiate.

• Settle.

Obviously you have to get past the investigation stage to carry out the other functions. The goal of any investigation should be a search to obtain the truth by determining the facts. The foundation of any investigation is the gathering of evidence to demonstrate the truth. Evidence can be considered anything that is used to determine or demonstrate the truth of an assertion being made.

There are four types of evidence:

1. Direct evidence — this involves giving evidence on your five senses.

2. Circumstantial evidence — this is evidence upon which a conclusion can be reached.

3. Hearsay evidence — these are statements that are not made in the presence and hearing of the subject.

4. Opinion evidence — this is opinion-based evidence given by a witness who is deemed qualified by the court and the opinions are based upon their training, skill, knowledge or expertise.

There are three forms of evidence:

1. Testimony — this is accomplished by going into the witness box in court and providing direct evidence.

2. Real — this represents physical evidence.

3. Secondary — this could come in the form of videotape, photographs etc.

The trial judge and /or the jury are considered to be the “trier of facts.” When they weigh the evidence before them they will give consideration to a number of things including:

• Credibility of the witness can be eroded with incomplete notes, criminal record, attitude, lack of witness preparation, poor case management.

• Effective cross-examination.

• Volume or lack of volume of evidence.

• Exclusion of evidence — a complete picture is not presented by the side calling the evidence.

• Sloppy investigation.

• Lack of continuity and contamination of exhibits.

• Spoliation of evidence.

In weighing the evidence consideration will be given to the “burden of proof.” In a criminal court proceeding, the Crown will be required to prove their case “beyond any reasonable doubt.” In a Civil Court matter, the burden is somewhat different as the test is proving your case “on the balance of probabilities.” Although the tests may seem different, when an insurer decides to deny a claim payment on the basis they believe the policyholder committed arson, they must do so very carefully. They are alleging their policyholder committed a criminal act. Most triers of fact will require the insurer to be able to ‘almost’ meet the burden required in a criminal court proceeding.

Bismark V. Sagl, Ontario Court Of Appeal, Apr. 23, 2002

Sagl v. Chubb Insurance Company of Canada, Ontario Court of Appeal May 8, 2009

How does one person end up in the Ontario Court of Appeal twice on issues relating to one fire loss? On Dec. 16, 1997, a fire caused significant damage to the building and contents of the primary residence of Bridgette Sagl. An investigator with the Office of the Fire Marshall investigated the cause of the fire and concluded it was intentionally set. The insurer hired fire experts who reached the same conclusion. Additional investigation by the insurance company led it to believe several material misrepresentations had been made that were relevant to the application for insurance. When scrutinizing the actual claim for damages filed, Chubb took the position that misrepresentations had also been made in this area. Coverage to the policyholder was denied and litigation ensued against the insurer.

Another legal action, Bismark v. Sagl, also commenced after the fire had taken place. This came from artist, Ruth Von Bismark. She alleged in trial that there had been a breach of contract and conversion relating to artwork destroyed in the fire that had been provided to Sagl for her to sell on behalf of the artist. This action included a claim for punitive damages for breach of fiduciary duty.

The trial judge found that Sagl, “failed to take any steps to sell the paintings and instead appropriated the paintings for herself.” In making this finding, the judge awarded $83,500 for breach of contract and conversion and $50,000 in punitive damages.

The decision was appealed to the Ontario Court of Appeal and Sagl represented herself. The appeal was dismissed with some interesting comments:

• The Appeal Court felt the trial judge made a “very clear and cogent finding of fact”.

• The finding of punitive damages was affirmed by the Appeal Court. They supported the trial judge’s decision that Sagl’s behaviour “rose to the level of wrongdoing necessary to justify such an award.” They affirmed the breach of fiduciary duty in “appropriating the paintings and her misrepresentation that some of the paintings were being sold to an American buyer.”

• The original trial judge felt Sagl was “guilty of planned and deliberate misconduct.” This and other reasons laid out by the trial judge provided “rational reasons” that supported the punitive damage award.

• Of interest, was an endorsement that related to the “insurance proceeds” from the fire. The Appeal Court agreed with the trial judge that Von Bismark was entitled to “priority” of payment if and when proceeds were paid by Chubb on the fire loss proceeds.

While that piece of litigation was winding its way through the courts, another case involving the Sagl house insurer was also on the move. The matter, before a Superior Court trial judge, lasted 22-days. A judgment was released on Sept. 4, 2007 (Sagl v. Cosburn et al, 54 C. C. L. I.(4th) 236) and several things should be highlighted:

• The trial judge did not accept the evidence of the fire marshall nor the insurer’s fire expert that this was an “incendiary” fire. He accepted the evidence of the policyholder’s fire expert that the fire cause was “undetermined.”

• The judge went further in commenting that even if this was a set fire he could not see the motive behind why Sagl would “torch her possessions”.

• The judge disagreed that material misrepresentations had been made on the policy application and in the subsequent filing of the insurance claim.

• An award was made for over $4.5 million in direct damages which was increased by a further sum of $500,000 for punitive damages.

This judgment went before the Ontario Court of Appeal in November 2008 (Sagl v. Chubb Insurance Company of Canada). Three Appeal Court judges heard this appeal, which led to a 47-page decision released on May 8, 2009. Given the original trial decision was 36-pages in length there was a great deal of analysis that went into this decision. It resulted in a new trial being ordered. Noteworthy within the Appeal Court decision is:

• The insurer did not appeal against the trial judge’s finding that the fire cause was “undetermined”.

• Reference was made to a judgment in July 1997 which was a divorce settlement awarded to Sagl of $4 million, payable on a quarter basis, plus on-going support. The plaintiff not only owned the property in questio
n, but also the home next door where her daughter, son-in-law and grandchild lived.

• The plaintiff was represented to the insurer as someone of wealth, but the evidence at trial showed she was in default on three mortgages. There had been a prospective buyer for the properties, but the conditions had lapsed. She owed substantial amounts to Canada Revenue Agency. When she applied for insurance coverage, excluding the mortgages, she had personal debt of over $1 million.

• At the time Sagl applied for insurance there was an additional issue about whether or not her ex-husband remained on title as a joint owner of one of the homes.

• The Appeal Court provided significant commentary on the events that took place between the insured, insurance brokers and the insurer during the period of time that the “binder” of insurance was in place. What emerged were three significant and material facts that the insurer felt would have altered their decision to insure this risk had they been revealed by Sagl.

• There was also a lot of specific attention paid to items claimed on the proof of loss that the insurer felt represented “intentional misrepresentations.”

In reviewing the case, the Appeal Court provides significant analysis which draw out certain conclusions of note including key points where the appeal did fail:

• The case law indicated there is a heavy burden put on the buyer of insurance, “… to provide full disclosure to the insurance company of all information relevant to the nature and extent of the risk that the insurer is being asked to assume.” The insurer felt the plaintiff had not made full disclosure of material facts within her knowledge. They felt the trial judge had relieved her of the good faith obligation to disclose material information and facts. The Appeal Court acknowledged the duty to disclose all material facts applies even if the insurer failed to ask the right questions. But, they noted if the insurer did fail to ask a specific questions, it could be open to interpretation that the insurer did not consider this to be a “material” fact.

The key issue for the Appeal Court was “materiality.” The insurer argued the trial judge had relieved the plaintiff of her good faith obligation to disclose facts within her knowledge that were material to risk being assumed. The Appeal Court felt the insurer was challenging the trial judge’s finding of fact that the information at issue was not material to the insurer. Was this a legitimate finding? The Appeal Court decided the facts which the insurer relied upon were not material to the decision to provide insurance to Sagl. This was supported by the evidence at trial, so the Appeal Court were not prepared to interfere with the trial judge’s decision on this point.

• The plaintiff denied she felt she was in financial distress when applying for insurance. She did not feel the insurer asked for information about the issues upon which they were now relying on to void the policy. The insurer’s viewpoint was they had been told she was “independently wealthy” and was going to be soon receiving a “substantial matrimonial settlement.” Attention was paid to the application for insurance and questions it contained. Reference was made by the Appeal Court as to whether or not an insurer’s failure to inquire “may provide evidence that the insurer does not consider the information relevant.”

On this point, Justice G. J. Epstein concluded:

“I agree with the trial judge that it runs contrary to the good faith obligation that the insurer owes to the insured for the insurer to agree to insure a risk, whether at the binder stage or at the time the policy is issued, when it knows or should know that there is information relevant to the risk that it does not have and that it did not even inquire into or that is incomplete, and then to raise the lack of information as a defence to a claim under the policy.” Epstein said she felt the insurer had to satisfy the trial judge that the information Sagl allegedly misrepresented or withheld was material to its assumption of the risk. She did not feel the insurer had done this and agreed with the trial judge’s conclusion on this point.

• One further element of the appeal to the trial decision was whether or not oral changes being requested to the original binder of insurance were acceptable or not. Chubb noted that “although changes to formal polices of insurance must be agreed upon in writing, it is entitled to rely on oral changes made to a binder prior to the issuance of the formal policy, as binders are often created instantaneously in circumstances where only the outline of a contract is discussed and the contract is therefore subject to change.”

The Court of Appeal did not accept Chubb’s position siting Sect. 124 of the Insurance Act applies to binder situations. Therefore, any changes need to be agreed upon in writing in order to be enforceable.

• Chubb’s position was that Sagl should be denied recovery because she did not prove her claim or she overstated it.

• The onus of proof is on the insured to prove their loss. This is based on the test of a “balance of probabilities.”

• The insured owes the insurer a duty of honesty and accuracy in making a claim.

The policy clearly states the policy is “void” if the insured “intentionally concealed or misrepresented any material fact relating to this policy before or after the loss.” There is clear law that once fraud is established, no matter the amount, the entire claim under the proof of loss is forfeited. The insurer’s appeal of the trial judge’s decision in this area centered on two points:

a) The trial judge mistakenly relied upon the fact that Sagl was underinsured.

b) The plaintiff’s credibility was a key issue and the foundation for the proof of loss submitted. The trial judge did not indicate in his reasons how he resolved the challenges to her credibility.

The Appeal Court decision agreed that the fact the insured may be under-insured has no relevance to whether or not a fraud has been attempted. But, they focused much of their analysis on the credibility of the plaintiff. They highlighted that her credibility was “intertwined with every aspect of the decision: the proof of loss was no exception.” The trial judge had to address challenges to her credibility and those challenges were “significant.”

The top court in Ontario felt that it was incumbent on the trial judge to “explain, even in succinct terms, how he resolved the challenges to credibility and reliability of evidence upon which Sagl relied in support of the amount of her loss.” In fact, the Appeal Court noted the word “credibility” did not appear anywhere in the lengthy trial judgment. The trial judge owed a more adequate explanation on this particular point. The role of the Appeal Court has been well established in that they do not lightly turn over decisions of a lower court. The reasons behind the decision should demonstrate the judge was “alive to” the central issues before the court. In this instance the Appeal Court felt the trial judge erred in failing to explain how he reconciled “the obvious problems with Sagl’s credibility and reliability, especially given the challenges to the authenticity, contents and values of the inventory.” So, the trial judge’s conclusions in this area were not articulated well enough.

The Appeal Court of Ontario struck down the entire trial judgment of the lower court, ordering a new trial but “restricted solely to the issue of Sagl’s proof of loss, specifically whether she is able to prove her loss in relation to her fine arts collection, and whether the policy is void due to intentional misrepresentation in the proof of loss.”

Summary

It certainly is unusual to have the same person in the Court of Appeal for two separate situations that weave together at the end of the day. There are some key points here relating to policy applications and insurers should take note of th
e guidance the Court of Appeal is giving on the need to ask detailed questions up front.

Alfano v. Piersanti, Ontario Superior Court Mar. 18, 2009

When litigation ensues it is not unusual for either side in the matter to hire a subject matter expert to try to prove their point of view. Even if you have previously been court-qualified as an expert, every time you get into the witness box you have to go through the same process. The lawyer will go through education, training, skill and experience to deem you qualified as an expert. The other side in the matter can challenge that request through a cross-examination process. The judge then makes a decision. If you are qualified by the judge to be an expert in your field then you can offer up an opinion to the court.

In Alfano v. Piersanti, in the middle of a trial, a witness was being offered forward to be qualified as an expert. The trial judge ordered the production of emails that were referred to in the dockets/time entries of Ronald Anson- Cartwright, the proposed expert. The plaintiffs challenged the impartiality and independence of the two reports produced by the expert. These challenges were heard in a voir dire.

The essence of the challenge to the expert’s credibility was summarized by the plaintiff’s counsel, James Diamond, in his closing statements when he referred to the decision of Justice Bellamy in Eastern Power Ltd. v. Ontario Electricity Financial Corp., wherein it was stated that, “The purpose of expert evidence is to assist the trier of fact to understand evidence outside of his or her range of experience so that a correct conclusion can be reached: R. v. D. (D), [2000] 2 S. C. C. It is commonly recognized that, in order to be of assistance to the trier of fact, experts must remain objective . . .”

Justice Macdonald accepted this as the role of an expert and went on to note that, ” . . . he or she cannot “buy into” the theory of one side of the case to the exclusion of the other side. To do so, poses the danger that could taint the court’s understanding of the issues that must be decided with impartiality and fairness to both sides. The fundamental principle in cases involving qualifications of experts is that the expert, although retained by the clients, assist the court.”

She commented that in some civil cases the “path of least resistance” seemed to be to admit the evidence and then compensate for it by attaching less weight or credibility to the opinion. But this is a rejection of the proper role of a trial judge. She quotes Justice Binnie who said, ” . . . the trial judge should take seriously the role of “gatekeeper”. The admissibility of the expert evidence should be scrutinized at the time it is proferred, and not allowed too easy and entry . . .” The expert must be neutral and objective.

A review of the email exchanges between the accountant expert and their client factored into the judge’s decision. The voir dire also illuminated the flow of information and the judge wrote she felt this proposed expert witness was actually not acting in an independent role but had put themselves into the role of an advocate for the client. As a result of this, the trial judge refused to qualify this person as an expert witness.

Summary

This type of situation does not happen very often in a trial. Did the additional information gleaned by reading emails between the proposed expert and his client represent the ‘tipping point’ in the judge’s decision? There are certainly good lessons to be learned in this case by any professional who might seek to be qualified as an expert witness in a trial situation.

Tavernese V. Economical Mutual Insurance, Ontario Superior Court May 26, 2009

A claim is being made against the insurer for valuables stolen from a wall safe. The evidence presented by two engineers hired by the defendant concludes that the safe was in the open position when damaged. According to the plaintiffs, the safe was locked when they left and they are the only ones who know the combination. If the safe door was open when it was removed from the safe then, “the logical inference is that the safe was left open or that the burglar or burglars had the combination. Both scenarios could lead the jury to the further logical inference that the plaintiff’s were complicit in the burglary. This expert evidence is therefore significant.”

The counsel for the plaintiffs challenged whether or not two engineers are qualified experts with respect to damages to a wall safe.

This ruling highlights a number of cases, but includes additional information that comes into play when dealing with a conflict between both parties as to whether or not a witness can be qualified as an expert:

• The challenge to the witness’s qualifications can be heard in the presence of a jury. If the challenge goes beyond the witness’s qualifications and might involve the actual opinion that might be expressed then it’s within the trial judge’s discretion to hear the challenge with the jury excluded. In the case at hand, this is exactly what the judge decided to do which resulted in this ruling.

• There is a four-part test to determining the admissibility of expert evidence (Regina v. Mohan, 1994, Supreme Court of Canada, 2 S. C. R. 9). In short:

a) Is the evidence relevant? b) Is the evidence a necessity for a trier of fact or jury to understand or appreciate something that is outside their own experience level? c) Is there an exclusionary rule? d) Is the witness a properly qualified expert?

The trial judge concluded that both engineers would be deemed qualified as experts and they will be allowed to give opinion evidence in the trial. This ruling is only one piece to the ongoing trial. The “expert” witnesses will introduce their investigative opinions before the jury and no doubt will be faced with a rigorous cross-examination. How this plays out in the end will depend upon what other evidence is introduced and how it all impacts the jury’s decision.

Conclusion

The Ontario Court of appeal is passing along important, especially as it pertains to policy application.

Glenn Gibson is the global chief strategy officer with Crawford & Company Inc.