Examples of Bad Faith Behaviour

Without a clear definition, it is necessary to look at the facts of other cases to get a sense of what behaviour can lead to bad faith litigation. 

The adjuster cases above are a good sampling which show how the attitude of the trial judge or jury is critical to whether bad faith will be found.

In Bullock the court noted that under the duty of good faith, an insured is dependent upon the insurer to undertake an adequate investigation and proper evaluation of a claim expeditiously.  As well, the insured is entitled to receive correct information, a fair interpretation of the policy and prompt payment of a claim when it has merit.  Conversely, scrutiny of doubtful claims is consistent with the insurer's contractual commitment to pay claims related to covered, and not excluded, risk.   Whether an investigation is "adequate" raises a question as to whether an error in judgment, simple negligence, incompetence, or gross negligence, in the right circumstances, may constitute bad faith.  Adequacy to the court may be different than adequacy to the average insurance professional.  A purely objective standard allows a court to import its view of reasonableness.  Bullock seems to illustrate a degree of leniency towards those that investigate claims but less so on examiners who analyze the claims. 

In that case, the independent adjuster for the insurer concluded that the plaintiff deliberately set fire to his car on the basis of an expert who noted a punctured fuel line and assumed it was deliberate.  The adjuster did not investigate the plaintiff's financial situation and had no factual basis to conclude the plaintiff had a motive for arson.  The adjuster also ignored the fact that nothing in the statements of various witnesses pointed to arson.  The court found that the superficial appeal of the fuel line puncture, and the fact that cars seldom catch fire, blinded the adjuster to a quick and firm conclusion without considering other theories.  Although the court did not find any bad faith in the sense that the adjuster bore malice towards the insured, the adjuster being blinded by a first impression and making no real effort to investigate further put the adjuster at risk of paying aggravated damages for mental and emotional suffering. 

The court did find bad faith on the part of the insurer for refusing to withdraw the allegation of arson after the plaintiff provided a report which disproved the arson theory.  Notwithstanding the fact that the insurer had an opinion from an expert that contradicted the insured's expert report and justified a denial on the basis of arson, the court determined that there was no reasonable basis for the conduct of the insurer after receiving the plaintiff's report which established other more probable explanations for the fire.  The court considered the fuel line theory to be very improbable because it required the insured to put himself at significant risk of burning himself.  It awarded aggravated damages of $25,000 but did not award punitive damages, noting that "breaching a duty to act in good faith is not tantamount to conduct which would automatically give rise to punitive damages."  Using language which tracks the definition of bad faith in Whiten, the court noted that a certain degree of unreasonableness and failing to consider the interests of the insured as much as its own did not necessarily mean it was "malicious" or "callous" conduct. 

In Kogan, the insurer denied a house fire contents claim on the basis that the insureds started the fire and that the amounts claimed under the proof of loss were excessive.  The adjuster admitted that because of the suspicious circumstances under which the fire had occurred (two points of origin and unexplained accelerants nearby) he treated the insureds differently than in a standard contents claim.  Perhaps angered by the insurer challenging the proof of loss on a line by line basis at trial, the court noted that the adjuster left the plaintiffs to fend for themselves rather than helping them with the proof of loss.  It noted that the adjuster did so because the adjuster was convinced of arson.  It awarded $170,000 for the contents claim and punitive damages in the amount of $100,000, on the basis that:

(w)here the insurer and/or adjuster acts unreasonably by effectively presupposing arson as the cause of the fire and taking steps to fortify this conclusion rather than objectively assessing the evidence to draw a reasonable conclusion there from, the label of bad faith will be justified and punitive damages should be awarded.

There, the insurer never advised the claim was denied, never inspected the contents, never prepared an inventory and rendered no assistance to the plaintiffs in preparing the proof, thereby prejudging the merits of the claim.  It was the prejudging of the claim that the court considered reprehensible, callous and highhanded conduct worthy of punitive damages.  The adjuster's conduct in testifying that the plaintiffs had not mentioned silverware and then admitting a reference to it in a report under cross-examination drew the further ire of the court as unfair and offensive.  

This case represents a better bright line between a test based on "adequacy" of the investigation which included conflicting evidence versus a situation where the insurer simply sought to build a case for denial.  However, it still suggests a purely objective test which may trap an insurer for a negligent as opposed to an unfair or malicious investigation and evaluation.

In Khazzaka, another arson case, the independent adjuster ignored evidence, acted in a partisan way, attempted to get firefighters and police to change their opinion of the fire, and tried to convince defence counsel to threaten the insured with criminal proceedings.  While the judge would not have awarded punitive damages, the jury awarded $157,000 for the fire damage to the plaintiff's auto repair shop and $200,000 for punitive damages.

The Fidler Case

As detailed below, this second decision from our highest court on bad faith provides a more definitive definition of bad faith by suggesting a combined objective/subjective test. 

The facts, at least interpreted by the court, are fairly straightforward.  Connie Fidler worked as a bank receptionist with the Royal Bank of Canada.  The Royal Bank of Canada had a group disability policy with Sun Life.  After a kidney infection, Ms. Fidler developed chronic fatigue syndrome and fibromyalgia.  She claimed total disability.  After two years, the disability policy would only continue benefits if Ms. Fidler was unable to do any job at all.  She received benefits for approximately five years until Sun Life conducted video surveillance and had Ms. Fidler prepare a lifestyle questionnaire.  That surveillance video showed Ms. Fidler getting in and out of her vehicle, driving, shopping, and climbing into the rear of her vehicle.  The lifestyle questionnaire indicated that Ms. Fidler could rarely go shopping and she preferred not to drive because of fatigue and pain.  A supplementary statement just prior to the surveillance indicated that Ms. Fidler felt well enough to take care of herself and her daily business such as paying bills and shopping but it seemed to be a fulltime effort.

After Sun Life denied the benefits, there was a period of two years' correspondence and various back and forth between Ms. Fidler and Sun Life.  Part of that back and forth included an independent examination.  The doctor concluded Ms. Fidler could consider returning to work on a graduated basis but, prior to this having a chance of success, she should embark upon a graduated training program to improve her level of physical fitness.  Ms. Fidler's doctor confirmed the existence of a total disability.  Notwithstanding the medical evidence, Sun Life's own internal medical examiner concluded that there was no medical and non‑medical evidence to support that Ms. Fidler could not perform at least a light physical, clerical or sedentary job on a regular basis.

The Supreme Court of Canada set out the Whiten[10] bad faith test - in addition to the requirement that the conduct surrounding breach of the contract constituted a marked departure from ordinary standards of decency, it must be independently actionable.  Where the breach is a denial of insurance benefits, a breach by the insurer of the contractual duty to act in good faith will meet this requirement of an independent actionable wrong.  For a disability insurer the issues are whether it breached its contractual obligation to pay the long-term disability benefit and its independent contractual obligation to deal with the claim in good faith.

The Supreme Court of Canada then set out the following:

"The duty of good faith also requires an insurer to deal with its insured's claim fairly.  The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim.  In making the decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner.  It must not deny coverage or delay payment in order to take advantage of the insured's economic vulnerability or to gain bargaining leverage in negotiating a settlement.  A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy.  This duty of fairness, however, does not require that an insurer necessarily be correct in making a decision to dispute its obligation to pay a claim.  Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.[11]"

It also noted that each case revolves around its own facts and that "what constitutes bad faith will depend on the circumstances in each case."  A court considering whether the duty had been breached will look at the conduct of the insurer throughout the claim process to determine whether in light of the circumstances, as they then existed, the insurer acted fairly and promptly in responding to the claim.

The Supreme Court of Canada simply decided not to interfere with the trial judge's conclusion that there was no bad faith.  In other words, it deferred to the fact that the trial judge saw and heard the witnesses and it was up to him to assess the evidence and determine its weight and effect.  Since it could not conclude that the trial judge had been "unreasonable or palpably wrong", the Supreme Court of Canada did not overturn his finding of no bad faith.  This contrasts with the position taken by the British Columbia Court of Appeal which overruled the factual findings of the trial judge and determined that Sun Life had acted in bad faith.

This suggests a standard above and beyond "adequacy".

However, many of the comments made by the Supreme Court of Canada, particularly surrounding the Court of Appeal's concern with Sun Life's conduct, indicate that trial judges in other cases may come to different conclusions.

The trial judge noted "Given the fact that the nature of Ms. Fidler's illness is of a type that is not demonstrated by indicators such as an X‑ray or MRI, I do not think that Sun Life's conduct should be characterized as an act of bad faith.  I say this even though Sun Life carried out what would appear to be at times a rather zealous approach to refuting Ms. Fidler's entitlement to the long-term disability benefits despite strong medical evidence that she continued to be disabled."  The Supreme Court of Canada rationalized that Ms. Fidler's behaviour in the course of its surveillance did demonstrate an ability to engage in some activities.  That, coupled with the ambiguity of the IME assessment, reduced the inference that Sun Life had an improper purpose in denying Ms. Fidler's claim.  The fact that Sun Life appeared to have a difficulty in ascertaining whether Ms. Fidler was actually disabled seemed to support a conclusion that it did not act in bad faith, and that the denial of benefits was the product of a real, albeit incorrect, doubt as to whether Ms. Fidler was incapable of performing any work.

The Supreme Court of Canada agreed with the Court of Appeal that many aspects of the case were troubling.  In particular:

            (a)         the absence of medical evidence to justify a denial of the claim;

            (b)        internal memoranda exaggerating the surveillance results and indicating an                                    intention to avoid looking bad in the event of litigation;

            (c)         failing to disclose that surveillance video on which it relied in denying the claim;

            (d)        the surveillance recorded activities not inconsistent with Ms. Fidler's self                                       reporting; and

            (e)         Sun Life's medical consultant was wrong in concluding that there was medical or                          non‑medical evidence that Ms. Fidler could not perform light work.

Of particular concern was the five‑year denial without medical support.  However the Supreme Court of Canada indicated that the issue was whether the denial was the result of an overwhelmingly inadequate handling of the claim or the introduction of improper considerations into the claim process.  It distanced itself from the Court of Appeal's conclusion that since Sun Life settled immediately before trial and paid full benefits with interest, that was the civil equivalent of a guilty plea.

The Supreme Court of Canada also reaffirmed that just because bad faith may be found, an award of punitive damages does not necessarily follow.

This ruling on bad faith suggests that courts may forgive honest but mistaken assumptions in the processing of claims.  This is a marked improvement over what appears to be the Court of Appeal's position.  That decision seemed to put an emphasis on according claims all the rights of due process and adhering to an objective standard.  As can be seen by the Court of Appeal's reasoning, if there is a reasonableness element imported into the test of good faith, then the courts could quickly substitute its views for that of the insurer.  The reasoning by the Supreme Court of Canada in Fidler seems to direct lower court judges to hold back on substituting their views of reasonableness for that of the claims handler.  The focus seems to be whether there is a rational or plausible basis for the decision.  An element of subjectivity is imported.  

The more problematic result of the Fidler decision is that it makes it more likely that insurers will face claims for damages due to mental distress not only in disability policy disputes but other types of claims involving personal lines.

Since Sun Life decided to restore the benefits and pay back interest prior to trial, when the matter went to trial the only issues were whether or not there was bad faith and whether Ms. Fidler was entitled to damages for mental distress caused by the breach.

Back in the days of black letter law, there was a general rule that mental distress damages could not be recovered for breach of contract.  That attitude is summed up in the following:  "Contract breaking is treated as an instant of commercial life which players in the game are expected to meet with mental fortitude."[12]  Moreover, the disappointment and/or distress arising from a breach of contract is seldom so significant as to attract an award of damages.  Another policy reason for not awarding mental distress damages for breaches of contract is that such distress is usually not in contemplation of the parties when the contract is made.

As with everything, over time, exceptions developed.  The first was where the mental distress is grounded in actionable conduct, not just the breach of contract itself.  In other words, there may be surrounding circumstances which give rise to an independent right to claim mental distress damages.  For example, conduct after the breach of contract might result in mental distress.  Another exception was developed for what are known as contracts of pleasure, relaxation or peace of mind.  This peace of mind exception started out with the premise that if the object of the contract or its very essence is to provide mental reassurance, then such damages were recoverable.  That test got watered down to where the mental component is a major or important object of the contract.  Thus contracts for travel, wedding photographs and luxury chattels were considered to be exceptions to the rule against mental distress damages for breach of contract.  These types of contracts had a built‑in mental component.  That exception also captured disability insurance contracts.

Arguably, it is more difficult to create an exception to a general rule against mental distress damages.  However, what the Supreme Court of Canada did was to turn around the equation and argue from first principles.  Using first principles tends to open up and expand the law. 

It started with the proposition that a party is entitled to damages for all consequences of a breach that the parties contemplated at the time of making the contract.  If a certain consequence would have been foreseeable at that time, then damages are recoverable.  Using that analysis, the Supreme Court of Canada distinguished commercial contracts where breach may lead to incidental frustration or anger but mental or psychological serenity is not ordinarily within the reasonable contemplations of the parties and contracts which provide psychological benefits where there is a promise in relation to the parties' state of mind.  If such mental security or satisfaction is part of the risk for which the parties contracted, then mental distress is implicitly in contemplation of the parties.  Damages would flow for a breach.

Moreover, the Supreme Court of Canada went further and said that mental distress did not need to be the dominant aspect or "very essence" of the bargain.  That interest is protected if it is part of the bargain.

Thus the test is now twofold:

(1)        Is the object of the contract to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties?

(2)        Is the degree of mental suffering caused by the breach of a degree sufficient to warrant compensation?

No longer are we dealing with aggravated damages in the sense that the award arises due to independent aggravated circumstances.  Now, mental distress damages are just part of compensatory damages depending on the type of contract.  In Fidler, the first branch of the test was satisfied.  Premiums are paid by the insured for benefits in case of disability.  The contract is not purely commercial in that it has only tangible benefits, the payments, but it also has intangible benefits, the incomes of security provided by those benefits.  Thus there is a reasonable expectation of security on the part of the insured.  The purpose of the contract is to avoid anxiety and stress.  The failure to pay benefits created financial pressure, which, coupled with the loss of work and the disability, raised the insured's anxiety and stress.

The overall evidence satisfied the second test-Ms. Fidler testified as to her anxiety and stress in not having the benefits.  Moreover, medical evidence also documented an increased level of stress and anxiety.  The trial judge's award of $20,000 was upheld.

It seems self fulfilling that the breach of such a contract will automatically lead to an award of damages.  If such contracts are designed to avoid stress and anxiety, breach of such a contract builds in the conclusion that the insured suffered anxiety and stress to a significant degree.  It will be interesting to see how the lower courts, and perhaps, the Supreme Court of Canada, define the compensation threshold.

Most cases in this area indicate that court should exercise caution in their awards for mental distress[13].  Cases in B.C. suggest that the range for aggravated damages is between $5,000 to $35,000.  There is some suggestion that $35,000 is high, but a trial judge's award in that amount was not set aside by the Appeal Court[14].

The expansion of aggravated damages in coverage disputes applies to homeowner's and other insurance policies.  Premiums are paid not only for payments in the event of loss but also in the expectation that one's home will be replaced promptly and a devastating financial loss would be avoided.  Being a defendant in a liability action is stressful in and of itself.  Being a defendant in a liability action where the insurer has advised that there is no defence and/or indemnity, particularly in an excess limits case, is even more stressful.  Creative plaintiffs' counsel will look and examine all circumstances relating to the adjustment of claims in an effort to obtain, at a minimum, aggravated damages.