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If you have any questions about this article, please contact Raman Johal or any other member of Clark Wilson's Insurance Practice Group.

For general feedback, please contact the editor Samantha Ip at ssi@cwilson.com.

September 8, 2011 - view full issue

Where There's Smoke, There May Not Be Fire: The Importance of Investigation and Communication by Insurers

By Raman Johal.

A recent B.C. Supreme Court decision again 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.

In Sidhu v. The Wawanesa Mutual Insurance, 2011 BCSC 1117, the Insureds’ home was damaged by fire in February 2005. All parties agreed that the fire was the result of arson. 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. However, 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'. The Insureds moved into a rental property and ultimately purchased a new home without being advised of the results of the investigation, apparently without even having been provided with a proof of loss form, and without any financial assistance from the Insurer.

In early 2007, the Insureds sued to enforce coverage under their insurance policy. They also alleged the Insurer acted in bad faith and claimed punitive and aggravated damages. It was only in response to these pleadings that 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, Mr. Justice Armstrong found that the Insureds' were entitled to coverage. In doing so, he noted significant gaps in the Insurers 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. This last omission was a crucial blow to the Insurers' theory that the fire was started inside of the house. In addition, the Court was critical of the Insurer's counsel's failure to cross-examine the Insureds about their financial circumstances or confront them with the defence theory that they intentionally set the fire to take advantage of the insurance proceeds.

After concluding that coverage was available for the Insureds' loss, the Court went on to consider whether the conduct of the Insurer was in bad faith and worthy of an award of punitive damages. At paragraphs 177 to 178, Mr. Justice Armstrong summarized the Insurer's duty of good faith to the Insureds as follows (emphasis added):

[177] The duty requires the insurer to deal with the claim fairly and in a timely way. In the circumstances of this case the investigation was never completed to the satisfaction of the defendant. The investigators had formed the opinion that Hardip was responsible for the fire and communicated that view to the insurer. In the circumstances, the defendant may have been justified in denying the claim and litigating the plaintiffs' entitlement. Apparently Wawanesa did not want to rely on that recommendation or assessment as a basis for denying the claim without obtaining further statements. They delayed their response to the Sidhus until the investigation was complete; that response came two years after the fact and only in response to a writ of summons claiming benefits under the policy. This appears to be the first time the defendant (as opposed to the investigators' suggestions in the interviews) told the plaintiffs that their claim was denied.

[178] In the circumstances of this case I conclude that the defendant was entitled to investigate the claim thoroughly and fairly. However, the plaintiffs had a reasonable expectation that their claim would be dealt with fairly, including timely investigation and resolution of their claim, and to be informed of the defendant's decision in a reasonable time.

Mr. Justice Armstrong held that the Insurer did not investigate the claim in a reasonable manner. He further stated that the lengthy and unexplained delay in advising the Insureds of the denial of their claim was unfair. Finally, Mr. Justice Armstrong noted that members of the public purchase home insurance contracts for peace of mind that they will be treated promptly and fairly if their home is damaged. He concluded the conduct of the Insurer was sufficiently reprehensible to justify an award of punitive damages in favour of the Insureds, albeit in the relatively modest amount of $50,000 ("modest" as compared with the $1 million awarded in the famous Whiten case).

No doubt there is much more to the story, at least from the insurer's point of view. But of course, as in all cases, it is the judge who makes the findings of fact on which the legal conclusions are based. This result in Sidhu demonstrates that where the trial judge makes findings of delay, incompetence and lack of communication with insureds in the handling of a claim, an insurer is exposed to a finding of bad faith and liability for punitive damages. It appears that had the Insurer in this case done a more thorough and prompt job in its investigation and communication of the claim denial to these Insureds, it is unlikely there would have been a finding of bad faith even if the denial of coverage was ultimately proven to be wrongly made.