Following the Five Commandments of Good Faith

Stephen Scullion, manager of professional development at Crawford & Company (Canada), kicked off his presentation at the Ontario Insurance Adjusters Association (OIAA)’s annual conference using a relevant clip from the 1940s film noire flick “Double Indemnity.”

In the clip, an insurance adjuster, a quick-talking, slick-haired man, sits across a desk from the insured, a farmer wearing grubby overalls and clutching his cap in his hand. The insured’s truck had caught fire, and he’d like to recoup his losses. The adjuster is not so convinced.

Based on a preliminary investigation, in which a gas-soaked rag was discovered, and nothing more than a gut feeling, the adjuster denies the claim and sends the farmer on his way, thanking him for closing the door behind him.

The clip garnered chuckles from the crowd. While it seemed exaggerated and far-fetched, Scullion, whose presentation was entitled ‘Of Red Flags and Good Faith,’ is concerned that some of the practices depicted in the film clip – such as treating the insured like an adversary and relying on suspicions instead of cold, hard facts – are still common in today’s industry.

He says such practices have led to claims of bad faith and the use of red flags in decision-making. “I know people that still adjust claims that way,” he said. “Squeeze them hard enough and then they walk away.”

It is still possible to prevent these behaviours, he stressed. But before prevention can be attained, it helps the adjuster to understand exactly what good faith is. The Ontario Superior Court in 2001 spelled out what Scullion called its ‘Five Commandments of Good Faith’ in Kogan v. Chubb Insurance of Canada.

The first two Commandments are “almost good faith in a nutshell,” Scullion explained. They include remembering that the relationship between the insurer and the insured is a contractual one, and thus there is an implicit obligation to uphold the reasonable expectations of both parties. Also, the insurer owes the insured fairness and a duty to be prompt in handling and assessing the loss.

Scullion also referenced the final three commandments, which are:

* the insurer owes the insured a duty of fair dealing, which includes payment in a timely fashion, so as not to breach the contract;

* the insurer must give as much consideration to the insured’s welfare as it gives to its own interests; and

* the insurer must not treat the insured as an adversary whose interests may be disregarded, and this implies a reasonable and competent investigation of the claim.

Should an insurer fail to honour these Five Commandments, Scullion told his audience, “the most powerful evidence to prove bad faith will probably be found in the correspondence between an adjuster and the insured.”

To protect themselves against bad faith claims, adjusters have two options, Scullion said. Either they should not allow plaintiffs to see all or parts of the adjuster’s file, or else they should be aware, diligent and practice in a way that they do not become their own worst enemies.

The second option should be a given, Scullion said. But adjusters do need to be wary of giving up the information contained in case documents simply because someone has asked to see them.

In civil actions, the entire goal is to not go to trial, Scullion observed. Of the many pre-trial conferences, the biggest one is discovery. As the name implies, in a discovery, no secrets are kept and everyone should know what the other’s case is. Still, there are always some documents the adjuster will want to keep from the other side.

Files can be protected from plaintiff lawyers if:

* it can be shown the documents are not relevant to the issue at hand;

* the insurer claims solicitor-client privilege; or

* the insurer claims litigation privilege.

If a file is not mentioned in a statement of claim, or if a general claims manual is requested, the adjuster will likely be able to prove these are not relevant to the case.

In terms of the solicitor-client privilege, Scullion refers to this as ‘confessional proof.’ Any client should be able to talk to their lawyer about everything and anything, and have it sacrosanct, he stressed.

“If I were to ask, ‘What do you think of this file?’ and you were to reply, ‘I don’t think you have much of a chance,’ and that gets into the plaintiff attorney’s hands, then your own lawyer hasn’t even given you a bloody chance,” Scullion quips. “Automatically, that’s bad faith. And all you did was ask a question.”

Litigation privilege is not as easy to find, he cautioned. There has to be litigation on the horizon as the investigation draws to a close.

Scullion recounted one of his first cases as an adjuster, examining a fire at a laundromat. “I’m not much of a launderer, but I sniffed gas,” he said. “Every machine had gasoline in it.

“Uh oh, this is arson, no doubt about it,” he recalled thinking to himself, adding with a raised brow: “And I’m pretty sure that things aren’t going too well for the owner.”

Scullion said he took three days to prepare his first report, which was stamped: Prepared in contemplation for litigation. “I had barely spoken to the insured,” Scullion said. “I got a statement off of him, but I knew where this was going, so I stamped it.”

Would this have been upheld? No way, he posited.

“It means I was thinking there was going to be an adversarial position against the insured,” he said, reminding the crowd of Ontario Superior Court of Justice’s Five Commandments.

Reasonable grounds to apply for litigation privilege are present when:

* an adjuster denies a claim due to a policy breach;

* an expert report shows that the fire loss was caused by a faulty electrical system;

* a plaintiff threatens to commence an action against the insurer;

* a plaintiff applies to the Financial Services Commission of Ontario for mediation; or

* an insurer retains counsel to handle a dispute with an insured.

But at the end of the day, a sage word of advice is to assume that your files will be seen by the other side, Scullion said. So it is important to be diligent and fair. One of the first steps is to avoid using red flags to settle or deny a claim, said Scullion. “If you use red flags to plan, then you’ve turned the insured into an adversary instead of a client to be indemnified.”

By doing so, he warned, it pre-supposes and can be viewed as unjustified suspicions. “Do nothing on a file unless you have a right or evidence to do so.”

But just because a claim has no red flags does not make it automatically legit, he noted.

He posed a scenario to the audience: an insured makes a claim for a stolen 42-inch television set three times in the span of a month, yet there are no carpet marks where the sets would have sat. “Take a photo. That equals hard evidence. The fact that the guy had three claims in a month? Not evidence.”

All that red flags accomplish is to create doubt, and doubt is not good enough to deny a claim.

When contemplating the denial of a first party claim based on fraud, he advised, remember these issues: * think like the other side;

* do not rely heavily on minor items; and

* exclusions will be interpreted narrowly and coverage will be given broadly.

He ended his presentation by reminding the crowd that they are in the business of indemnifying, not denying. “Express what you are doing [to the insured] and why in a humane fashion” he said, “and that is good faith.”

He reminded everyone that, “You do not have to be right. What you have to be is open. You can be right, pay a claim and still be in bad faith. You can be wrong, deny a claim and not be in bad faith. Fairness and promptness must exude from every paper in the file.”

And lastly, “if you don’t want the insured to see what you’re doing, don’t do it. The plaintiff lawyer is always lurking in the background.”