A bad faith claim against an insurer may result in liability beyond the policy limit. Where a plaintiff establishes that its insurer has responded to a claim in a manner that is offensive, reprehensible, or high-handed, the insurer may be exposed to punitive damages, aggravated damages, or payment of a third-party judgment in excess of the policy limit.1
Three recent appellate decisions have addressed various aspects of bad faith claims. These decisions provide commentary on: (a) conduct that rises to the level of bad faith, (b) disclosure required by an insurer faced with a bad faith claim, and (c) the availability of substantial indemnity costs against an unsuccessful plaintiff.
Sky Clean Energy Ltd (Sky Solar (Canada) Ltd) v Economical Mutual Insurance Company (2020 ONCA 558)
Sky was a developer of solar energy products and was named as an additional insured on a policy with Economical. Sky was only covered on the policy to the extent of the liability arising from the operations of the principal insured, its contractor. A fire caused by flawed electrical transformers damaged Sky's development project, and Sky eventually sought to recover damages from Economical for the loss.
The treatment of the bad faith claim in this case turned on an arbitrator's finding that Sky was responsible for the selection of the transformers. The parties agreed to treat this as a fact at trial.
Sky claimed that Economical treated their claim in bad faith, in part because they denied coverage without conducting a separate investigation. On appeal, the ONCA confirmed the following: (1) Economical's 13 day delay in acknowledging that Sky was an additional insured did not rise to the level of bad faith, and (2) Economical did not act in bad faith by denying coverage without appointing an adjuster or investigating the claim. In this case, the arbitrator's finding that Sky had selected the transformers constituted an "objectively reasonable basis" on which to deny coverage. The insurer was not required to investigate further.
Kanani v Economical Insurance Company (2020 ONSC 7201)
Absent "exceptional circumstances,"2 an insurer is not required to produce an internal estimation of its reserves in the face of a bad faith claim. The Divisional Court recently confirmed this outcome by denying leave to appeal a Superior Court motion order.
The plaintiff had alleged that the insurer's internal information regarding their financial exposure impacted their knowledge of the plaintiff's present and future care needs. It did not allege that the insurer set the reserves in bad faith but argued that the reserves were relevant to what Economical knew or ought to have known about the plaintiff's condition.
The motions judge found that setting reserves was immaterial to any alleged bad faith by the insurer; that portion of the claim was struck from the pleading.
Pinder Estate v Farmers Mutual Insurance Company (2020 ONCA 413)
"The failure of a plaintiff to prove a claim of punitive damages or breach of the duty of good faith against an insurer does not in itself justify an award of substantial indemnity costs. There must be a finding that the plaintiff engaged in conduct which is deserving of sanction."3
In Pinder, the plaintiff brought a bad faith claim against its insurer after a fire and subsequent denial of coverage under the policy. The plaintiff was unsuccessful at trial, and the insurer was awarded substantial indemnity costs from the date of its offer - in part because the trial judge found that the plaintiffs' allegations were unsubstantiated.
On appeal, K. van Rensburg JA noted that substantial indemnity costs were warranted in past cases where:
- the plaintiff made unsupported allegations of bad faith, misconduct, and incompetence where no evidence is provided to support the claim;
- serious allegations of bad faith were publicized in the media;
- the plaintiff has used intimidation tactics by exaggerating its claims;
- the claim had "no air of reality" and was based on fabricated testimony.
In this case, the Court reduced the costs award, stating that the plaintiff's conduct did not rise to a level warranting a sanction with substantial indemnity costs. The weaknesses in the plaintiff's case (relating to witness credibility) did not preclude the plaintiff from being able to "vigorously challenge" its insurer's conduct.
1 "Good Faith in Canadian Insurance Law", s 1.20 "Terminology"
2 Kanani at para 21.
3 Pinder at para 148</p>
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