April 7, 2020 by Harmon C. Hayden, founder, Harmon Hayden Law
The law of bad faith and punitive damages for bad behaviour by insurers continues to evolve in Canada, as a recent case moves the law of good faith for insurers farther down the rabbit hole.
The recent British Columbia Supreme Court decision in Stewart v. Lloyd’s Underwriters has the potential to change the course of business among underwriters, coverholders, claims administrators, and their legal counsel. Of particular interest in this case is that punitive damages for bad faith were awarded against the defendant insurers even when coverage was admitted prior to trial.
The plaintiff was on vacation in Nevada in 2015 when he suffered a brief loss of consciousness (called syncope), fell to the floor, and suffered injuries to his neck. He suffered temporary partial paralysis, was treated with a pacemaker, and underwent surgery to his spine.
Prior to his travel, he had purchased travel medical insurance underwritten by Lloyd’s and Alliance Insurance and Financial Services. North American Air Travel Insurance Agents Ltd. was the coverholder. OneWorld Assist Inc. was the claims administrator, which was at all times the agent of the other defendants and acting within the scope of its authority.
Health care bills totalled nearly US$300,000. The insurers initially took the position that the claims were excluded since the injuries were directly or indirectly related to alcohol intoxication, which was excluded under the policy. After three years of litigation, the insurers managed to settle the claims of the healthcare providers for approximately 21 cents on the dollar.
One might think this was exemplary work. Instead, it led to exemplary damages.
The insured had been drinking and had a blood alcohol concentration of .07% upon hospital admission. He denied intoxication. The treating physicians noted in their records that alcohol was not a factor. Syncope can be caused by a temporary drop in the amount of blood that flows to the brain and may be unrelated to alcohol intoxication.
The claims administrators, however, appeared to have started the investigation with a bias towards intoxication as being the cause of the injuries. The trial judge concluded that, at the outset, the insurers were justified in questioning intoxication as being a factor.
However, their records showed “a surprising willingness to deny coverage without adequate investigation.” A central issue was whether the syncope was caused by a cardiac condition or whether alcohol was a major contributing cause. The claims administrators didn’t ask trauma physicians why they concluded that intoxication was not a factor. They didn’t make adequate inquiries as to whether there was a non-alcohol-related cause of the syncope.
Indeed, they were alerted to other non-alcohol causes such as underlying cardiac problems. They were advised to undertake further investigation, which they did not do before denying coverage.
Further, the insurers were opaque in their denial. They did not alert the insured that there were other possible causes of his syncope that were not alcohol-related.
B.C. Supreme Court Justice Barbara Norell concluded that there was bad faith in the investigation of the claim. This was an overwhelmingly inadequate investigation. The most egregious example of bad faith arose when the insurers decided to extend coverage and their handling of the health care bills. In summary, the judge noted:
• The claims administrator belonged to a network of insurance companies that had contracts with U.S. health care providers and that negotiates discounts on health care bills.
• Discounts are standard in the industry
and may typically be in the range of 20%
• They had initially told the health care providers that coverage was being denied. They never advised them that coverage was being extended.
• They were aware that further discounts may be available if coverage was denied.
• In a flurry of activity in the weeks before trial, claims valued at US$274,052.97 were settled for US$56,429.81, or approximately 21 cents on the dollar.
• At no time did the insurers advise that their position on coverage was being reversed.
While the investigation itself did not reach the level of malicious, arbitrary or highly reprehensible misconduct until the latter stages, the manner of “satisfying the health care bills” did. The settlements were motivated solely by the economic interests of the insurers and this was “reprehensible and the most egregious of the circumstances.”
The judge concluded that the breach of good faith should not go unpunished. Thus, punitive damages were awarded against the defendants for $100,000, plus $10,000 for mental distress. The defendants were also ordered to indemnify the plaintiff for any claims presented by the health care providers.
Insurers and claims administrators would be well advised to ensure that their claims handling process is in accordance with their duties of good faith. This case is a cautionary tale that claims handling procedures must be reviewed and improved in response to increasing risks of punitive damages.
Harmon C. Hayden is the founder of Harmon Hayden Law. He is vice chair of International for the International Association of Defense Counsel’s Insurance and Reinsurance Committee.