B.C. court awards $50,000 in punitive damages after finding that insurer took too long to advise insureds of denial of coverage in fire claim

A recent B.C. Supreme Court decision, Sidhu v. The Wawanesa Mutual Insurance, highlights the need for insurers to undertake effective and fair investigations before denying a claim for coverage — and then promptly communicating their negative coverage decisions to the insured.
Failure to do so can result in a punitive damage award for “bad faith” claims handling, according to Clark Wilson LLP associate Raman Johal, who referenced the case in an article published in the Sept. 8 edition of Insurable Interest.
In Sidhu, the insureds’ home was damaged by fire in February 2005. All parties agreed the fire was the result of arson, Johal notes.
“Shortly after the fire, one of the insureds provided a statement to the insurer which, when compared to fire investigation reports, led the insurer to believe that the insureds were not being truthful and reasonably gave rise to suspicions they were involved in starting the fire,” Johal writes.
“In late March 2005, the insurer held an in-house meeting in which they decided further interviews and investigations were required but then apparently failed to follow through with these investigative steps and failed to communicate any coverage decision to the insureds.”
Meanwhile, the insureds moved into a rental property and ultimately purchased a new home without being advised of the results of the investigation.
The court decision says no evidence existed that the insureds had received a proof of loss form from the insurer prior to February 2007, and they did not receive financial assistance from the insurer.
The insureds sued to enforce coverage under their insurance policy in 2007. They also alleged the insurer acted in bad faith and claimed punitive and aggravated damages.
In response to the pleadings, the insurer formally notified the insured of the denial of coverage based on the belief that the insureds were responsible for the fire.
At trial, B.C. Supreme Court Justice Trevor Armstrong found the insureds were entitled to coverage.
“In doing so, he noted significant gaps in the insurer’s evidence on the following issues: the financial stressors which may have caused the insureds to commit arson, the potential increase in the value of the property if the house had been replaced under the policy and evidence of whether the glass from the broken window in the master bedroom fell inside or outside of the home,” Johal writes.
“This last omission was a crucial blow to the insurers’ theory that the fire was started inside of the house.”
The court went on to find the insurer acted in bad faith because it had taken too long to notify the insureds about denial of coverage and ordered punitive damages of $50,000.
The full decision can be found at:
http://www.courts.gov.bc.ca/jdb-txt/SC/11/11/2011BCSC1117.htm