Property Update

For the past 20 years, I have had the pleasure of both developing and participating in a unique training school. The course is a six-day program that is cosponsored by the U.S. Bureau of Alcohol, Tobacco, Firearms & Explosives (ATF) and the International Association of Arson Investigators (IAAI). The course name is, “Complex Arson Fire Investigation Techniques for the Insurance Industry” (CAFITII).  

The course is hosted at the Federal Law Enforcement Training Center (FLETC) in Brunswick, Ga. This is a secure training facility for U.S. federal law enforcement agencies. Normally, non-law enforcement personnel are not allowed on the base.  

When the program was more than 25 years ago, there was a huge ‘arson for profit’ problem in the United States. Arrest rates were low and the conviction rates even lower. Punitive and aggravated damage awards were attracting very significant sums. How could the authorities and insurers cooperate but stay within their respective rules? Two outcomes resulted from the initial partnership:
1.    The joining up of these two organizations helped create the momentum that saw the creation of the first “arson immunity” regulations. It started with a few U.S. states and eventually snowballed across the entire country. These new rules created a pathway for insurers to provide information from their investigation files to the authorities. In return they were immune from civil ‘bad faith’ lawsuits from their policyholders.  
2.    The CAFITII training program was created. Instructors are the very best that ATF and the IAAI could provide. The course is designed to embrace the very best of adult-oriented, interactive learning programs. The ultimate goals are to elevate the skill level of the students so everyone would benefit from a stronger, more professional work product.

The last class hosted 47 students from the police, fire and insurance sectors, including four students from Canada. Their evaluations ranked the program at 94 per cent. The curriculum includes:
•    effective selection and use of fire experts;
•    civil versus criminal investigations;
•    reciprocity and exchange of information;
•    NFPA 921;
•    spoliation: preservation of evidence;
•    financial investigation basics;
•    fire science: electrical fires; live demonstrations in fire cells and on the explosives range;
•    Visual Link Analysis / software programs / IT as an investigative tool;
•    interviewing techniques; and
•    effective cross-examination of an expert witness

A key feature of the week-long training is a practical exercise that runs over two days.  The students are required to work in “teams” on a real case. The case study methodology of teaching is a powerful learning tool for the students.

One challenge raised in class during the open forum is, “Rather than be concerned about how you will defend yourself from a bad faith lawsuit, how will your file prove that you acted in good faith?” Think about that subtle, but rather significant, shift in perspective, which could apply to any claims investigation.

Some student comments from the program:
•    “The course demonstrated how evidence leads any investigation. There should not be preconceived ideas. You always need an open mind.”
•    “The case management program is exceptional value for any adjuster how is handling complicated losses.”
•    “This training program has great value to any professional loss adjuster.”
•    “What a great week of learning what I thought I already knew.”

It is difficult, in my view, to find a better training program in North America to upgrade the skills of property loss adjusters. Our corporation has graduated more than 60 loss adjusters from this program. The registration cost is $750 / student.  

For more information, go to www.arsoninsuranceschool.com.

Thomas v. Aviva Insurance Company,
New Brunswick Court of Appeal,
October 27, 2011

The initial trial on this matter covered two days and resulted in a seven-page written judgment. The Appeal Court decision exceeds 44 pages.  

On Dec. 15, 2007, an accidental fire caused about $24,000 damage to a modest home in Saint John, N.B. The source of the fire was the failure of an insulated flue on a wood stove.

Coverage for the loss was denied based upon statutory condition #4: a failure to disclose a material change in the risk. The denial of coverage was communicated in writing on Dec. 27, 2007. The named insured was 74 years old and had a hearing disability. He lived alone and relied on old age pensions for income. He graduated grade 6 at the age of 16. The original trial judge concluded that the insured had “some interruptions or difficulties with his elementary education.”

The insured purchased his policy of insurance through a broker on Apr. 12, 2001. This broker had viewed the home, but the application for insurance was completed in the broker’s office. He asked questions, which the insured answered. The insured signed the application, in which he affirmed that the dwelling’s “primary heating system was electrical.” He reported that he never read the policy and didn’t remember ever getting a copy.

The insured installed a wood stove in the back porch of the house to supplement the home’s electrical heating in 2001. He replaced this original stove with another given to him by a friend in 2006. The insured said he did not contact his broker about the wood stove because “I thought it was okay to have a wood stove because the house was electrically heated.”

For six renewals, the insurer sent a notice to its insured. Part of the notice included a warning that the insured needed to ensure that “all the information is accurate” because the coverage and premium were based on the original information that had been provided. The Appeal Court noted that, “none of the yearly renewal notices made any reference to wood stoves.”

The broker provided an affidavit to the original trial, which the Court of Appeal referenced in detail in its decision. The broker confirmed he had done business with this particular insured for more than 30 years. Prior to the fire, he had no idea that the insured had installed a wood stove. He did, however, make an important comment: “I have never received a memo or letters from (the insurer) providing information on what the company considers a material change in risk. I have never told policyholders, including Hubert Thomas, that the installation of a wood stove could void their policy or that they have to contact me or the insurance company if they intend to install a wood stove.”

The insurer also provided information at the original trial indicating they would not have provided insurance for a house with this wood stove as it was not professionally approved or installed.

The trial judge felt the insured did not know adding the wood stove might be considered a change material to the risk. He did not feel the insured had the requisite “guilty knowledge” and indicated that this particular insured “ . . . did not subjectively appreciate the wood stove’s materiality for risk purposes.”

Reference was made to the wording of the policy renewal document. They highlighted wording used by another insurer in the case of Jackson v. Canadian Northern Shield
Ins. Co. The language of this document was more explicit in what they felt constituted a material change in risk.  

The New Brunswick Appeal Court paid considerable attention to a growing body of cases that suggest:
1. How does an insured know what is a material fact unless they are specifically advised by the insurer?
2. If an insurer fails to ask a question, is it not reasonable to draw an assumption that the information was irrelevant?

The Court of Appeal affirmed the decision of trial judge Justice H. H. McLellan and allowed the insured’s claim.

Case summary

This is a very well written decision. It contains the Court of Appeal’s guidance to underwriters that suggest how they might word their renewal notices to policyholders.

In the initial trial, a claim was also advanced for general damages. This related to the emotional distress the insured had suffered as a result of his claim being denied. The trial judge dismissed this claim. When an appeal was launched by the insured, it cross-claimed for general damages, but prior to the Appeal Court hearing the case they decided to discontinue this part of the action.

Pietrangelo v. Gore Mutual et al,
Ontario Court of Appeal,
Feb. 23, 2011

I previously reported on this decision. A rental property was destroyed by fire when the tenants were converting a half-pound of marijuana into oil. The main question in law was whether or not the marijuana exclusion in the policy of insurance could be applied.

The Court of Appeal agreed with the trial judge that the policy language was not ambiguous, the exclusion was not unjust or unreasonable and the intent surrounding the exclusion was to specifically deal with marijuana grow houses.

There was a great deal of evidence in the original trial about the manner in which the policyholder was notified of the addition of the marijuana exclusion. Great attention was also paid to the process in which the insurer sent out mail. There are several very good tips within this case that all insurers should take note about.

The plaintiff lawyers appealed this decision to the Supreme Court of Canada, but they were recently advised that the top court in our nation would not hear any further appeal.

Sidhu v. Wawanesa Mutual Insurance Co.,
B.C. Supreme Court, J. Armstrong,
Aug. 17, 2011

This decision was released six months after a 10 day trial. The trial only looked at whether or not the claim was covered.  

This case involved what was thought to be an intentionally set house fire at 1 a.m. on Feb.7, 2005, in Surrey, B.C. The insurer denied coverage based on the intentional act exclusion. The onus was on the insurer to prove, on the balance of probabilities, that it had strong evidence to support the three elements of the arson triangle: Was the fire cause incendiary (arson)? If yes, did the insureds have motive? If yes, was there exclusion or ample opportunity?

Seven people lived in the house on the night of the fire: the parents, three young children and one set of grandparents. Most of them were asleep in the dwelling when the fire was discovered by one of the insureds.  

The named insureds were Gurmit and Hardip Sidhu. The husband had been trained as an auto mechanic and ran an auto repair business. His wife was not employed and had health issues that prevented her from giving evidence at the trial.

This decision outlines, in significant detail, the evidence of several members of the Sidhu family who were in the house on the night of this fire.  

Fire department investigators and private experts retained by the insurer concluded this was an incendiary fire. At trial, there was conflicting evidence as to whether or not the fire was initiated inside or outside the dwelling. The insureds felt it was highly improbable that one of their family members would put everyone’s life at risk by initiating this fire.

The trial judge gives a lengthy, thorough explanation of how he viewed motive and opportunity. Despite some “less than convincing evidence” from one of the insureds, the trial judge felt the insurer had failed to prove, on the balance of probabilities, that the insured’s were responsible for setting the fire.

After allowing the damage claim, the trial judge turned his attention to whether or not to award “punitive damages.”  

Whiten v. Pilot Insurance Company is the leading authority on punitive damages in Canada. The case was referenced in detail by the trial judge. The decision spells out the duty of an insurer to a policyholder to investigate and assess the claim on its “ . . . merits and in a balanced and reasonable manner.” Part of acting appropriately is that the insurer must be interpreting and communicating decisions to the insured in a timely manner.

The judge seemed to focus on three things when viewing the handling of the claim:
1. At a meeting in March 2005, a decision was made to undertake a follow-up investigation. It did not appear this additional work was ever completed.  
2. There was no evidence that a proof of loss had been sent to the insured until February 2007 — two years after the fire.  
3. The claim was not denied until two years after the event and only in response to a legal action being started.

An award of $50,000 was made against the insurer for punitive damages.  

A claim was also made for “aggravated damages.” Was their mental distress caused by the manner in which this claim was handled? The judge found the evidence introduced on this point was inadequate and unconvincing. No award was made on this head of damage.

Case summary

During a trial, cases may get better or worse as witnesses provide their evidence. The trial judge is weighing the credibility of each witness. Are they believable? In this trial, the judge highlighted some issues, but clearly he did not feel the insurer had crossed the threshold of proving its case on a balance of probabilities. Once that decision is made, the focus turns to all the intricacies of the quality of the investigation and file handling. A lot of attention was focused on the proof of loss. Was it sent or delivered to the insureds in compliance with the Insurance Act? The adjuster said it was provided to the insureds, but was not able to prove this in court.  

The case highlights the need for timely denial of coverage. If you fail to do so in a timely manner, you are exposed to punitive damages.

D.M. Drugs et al v. Baywater et al
Ontario Supreme Court, Nadeau D.,
Jul. 27, 2011

This decision resulted from a 12 day trial in North Bay, Ont., as a result of a major fire that took place on Feb. 5, 2002. The smell of smoke was first detected around 1 p.m.  The fire department was quickly on scene, observing that the fire was in a basement furnace room beside the chimney. That fire was quickly knocked down, but this older building had “balloon construction” and the firefighters had great difficulty catching up with the rapid spread of the fire. Eventually, the building was destroyed.

During the trial, the judge heard testimony from 16 witnesses and 87 exhibits were introduced into evidence. The judge paid considerable attention to the firefighter’s observations and those of other non-expert witnesses. He relied upon their evidence when considering expert evidence from a number of fire experts.

Investigators from The Office of the Fire Marshal concluded this fire was of an “undetermined cause.” A number of fire experts also testified. This became a “battle of the fire experts,” the judge commented.

Four private fire investigators also gave evidence.  The judge noted that: &ldquo
; . . . the Court requires that an expert witness provide independent assistance to the decision-maker by way of objective, unbiased opinion in relation to matters within their expertise. An expert witness should never assume the role of an advocate . . . ”

The judge was very critical of the evidence he heard from several of the fire experts. The judge’s comments on some of their evidence included:
•“(He) . . . demonstrated little respect for differing views and he would absolutely not concede in his opinion even when confronted in cross-examination with evidence clearly contradicting his testimony. . .”
• “His cross-examination is replete with examples showing his reluctance to answer even the most direct questions without a rambling, partisan reply.”
• “It became obvious the battle of the experts was becoming quite personal . . .”
• “I did not find (this expert) to be fair, objective and non-partisan.”

The trial judge went on to conclude, on the balance of probabilities, that the fire originated in the basement near a vent pipe connector that led to a boiler. He also concluded there was reasonable evidence that the fire resulted because of the negligence of one codefendants, who the judge found had failed to maintain and inspect the boiler.  

Case summary

Given that the public authority concluded the fire cause was undetermined, this was probably an uphill battle to prove negligence against the firm who serviced the boiler. When you add such diverse opinions of a variety of fire experts, this trial was certainly a challenge for the judge. But, in reading the case, it is very clear that he paid attention to the evidence of the eyewitnesses — particularly the firefighters. The judgment highlights what can happen when a judge feels an expert does not provide independent assistance to the court. Experts are not advocates of the party who called them.

1369349 Ontario Inc. v. Yanch Heating et al,
Ontario Supreme Court, McIsaac J,
Mar. 14, 2011

This was a 10 day trial arising from a major fire that occurred at a commercial building in Barrie, Ont. on Jun. 28, 2004. The lawsuit was against an electrical firm who had installed an electrical cable two weeks prior to the fire.

As was true in the previous case described, the trial judge also referred to this case as a “battle of the experts.” Everyone seemed to agree the fire originated in a utility room. One expert, acting for the building’s insurers, felt the fire originated at a penetration point where the electrician had passed the electrical cable. The other expert, acting for the electrician, felt the fire was triggered by an undetermined event that took place in the ceiling area of the utility room.

An attempt was made to break the impasse between the two original experts by bringing in a third expert. This expert eventually concurred that the point of origin for the fire was where the electrical cable penetrated a window opening.  

The trial judge concluded that, on the balance of probabilities, the fire originated at the window penetration caused by the installation of electrical cable two weeks before the fire. But the judge put a lot of weight behind the direct evidence of the electrician who did the installation. Clearly, this witness impressed him.  The judge said: “In the final result, although I have some suspicions about the quality of the installation and as to the overall credibility of the defendant, these concerns do not rise to the sufficient level to cause me to not accept his denial of professional negligence in this case. I am satisfied that the appropriate standard of care has been met, and accordingly, that the inference to the contrary has been rebutted.”

Case summary

It is interesting to see the trial judge agree on the origin area by relying on the two building insurer experts, but on the other hand attribute a great deal of credibility to the evidence of the lay witness (electrician).  

A trial involves real people. The judge weighs credibility. Who does he believe? What weight should he give to certain evidence? In this case, the judge seemed to be favoring the building owners, only to swing in a different direction.

Conclusions

Experts play a key role in the decisions we make on our files. It is very important to hire the right experts. I have written and commented on this issue repeatedly in the past 15 years. If anyone wishes a copy of my previous article on this topic, including a checklist of things to ask before you retain your experts, please send me an email.

Consider the question, “How can I prove I acted in good faith on a file?” These questions should form part of any file review:
1. Did you provide your insured with a timely, thorough investigation?  
a. Have you eliminated or confirmed ALL investigative leads?
b. Could someone argue that you had tunnel vision very early in the file and did not keep an open mind?  
c. Do your file notes and reports reflect this mind set?
2. Are you open and transparent with the insured on the results of your investigation and timely with informing them of a decision? If you deny a fire claim for an “intentional act,” you are alleging your insured has committed a criminal act. While the civil burden of proof ask you to prove your case on the balance of probabilities, make no mistake: The standard of proof when alleging a criminal activity is elevated and will more resemble a burden nearing “beyond a reasonable doubt.” Does your evidence meet that test?
3. Who was present when you made a decision to deny coverage?
a. Were detailed notes taken of this meeting?
b. What evidence was reviewed?
c. Can you show specifically the information you relied on to make that decision?
d. Does your file reflect that you did not make this decision lightly?  
e. Did you challenge the quality of your own evidence?

Have you considered a peer review of the file?  Having a third party expert review the file is one way to show you were acting in good faith.

Some things to think about.

Glenn Gibson is the executive vice president, global strategy, projects and development, with Crawford & Company.