Duties of insurer and insured
Our common law, shaped by centuries of judges’ decisions, demands that an insurance company (insurer) and the person it insures (insured) act in good faith towards one another.
Example 1 – When a person applies for life or disability insurance, they must answer honestly all questions about their health history, even ones that seem irrelevant or overly cautious. Yes, maybe all that recent fatigue is just from recent overexertion, but the insured must note it anyway.
Example 2 – The insured has experienced a loss, perhaps a theft or fire, and they must complete a form outlining what was lost and its value. There’s a good faith duty to make that list accurate.
Flipside 1 – The insurance company must also act in good faith. When a claim is made, information about losses must be taken and reviewed with a willingness to pay all legitimate claims.
The reason insureds must give full disclosure on application forms is that an insurer is entitled to (and must, in order to survive economically) assess the risk that the applicant may make a claim. If there is a risk, the insurer has a choice of either rejecting the application completely, waiving the problem (if the insurer considers it immaterial) or excluding a particular risk (e.g. for a person who’s had heart trouble, the insurer may exclude disability or death caused by heart problems). Courts have ruled that an insurer doesn’t have to double check everything a person says when completing the form; it’s the insured’s duty to get it right.
The reason insurers must handle claims in good faith, is that the insured has paid real after-tax dollars for a promise – that if something goes wrong, the insurance company will make up whatever loss is covered by the insurance policy. The insured is paying concrete costs in exchange for a contingency that may not happen.
If the insured doesn’t act in good faith? If the insured has put inaccurate information on their application for insurance, the courts have held that the policy should be declared void ab initio (from the beginning), even if the insured suffers a loss from a cause unrelated to the misrepresentation. In other words, any inaccuracy (whether in applying for coverage or in making a claim) can make the policy completely invalid.
The courts do have a right under the common law and under the Insurance Act to provide “relief against forfeiture” in some cases where the insured has made a mistake in advancing a claim. But the circumstances in which relief is provided are limited.
If the insurer doesn’t act in good faith?
In addition to ordering that the insurance claim must be paid, the court may give two further remedies:
- Damages for mental distress
In a 1996 decision, Warrington v. Great West (a claim for disability benefits), the B.C. Court of Appeal held that when the policy is specifically designed to provide peace of mind, an insurer who wrongly refuses to pay benefits may be liable to pay damages for mental distress. The test is whether the insured’s wrongful actions have hurt the insured. Damages for mental distress have generally been limited to between $5,000 and $20,000. This sum is designed to compensate the insured for the additional suffering caused by a breach of the insurer’s duty of good faith.
- Punitive damages
In Whiten v. Pilot Insurance Co., the Supreme Court of Canada was asked to decide whether the insurer should also be punished if it breaches its duty of good faith. Whiten involved a fire loss – Mr. and Mrs. Whiten’s home burnt down. They claimed for about $345,000 on their fire insurance. Pilot Insurance Company decided the Whitens might have deliberately set the fire and refused to pay… even after the fire marshal and Pilot’s own investigator concluded there was no convincing evidence of arson.
The lawyer for the Whitens argued that Pilot ought to be punished to deter them from future similar behavior – e.g. denying claims where there was no credible basis to do so, hoping timid or meek claimants would just walk away. A jury agreed and awarded the Whitens $1 million in punitive damages. The case was appealed up to the Supreme Court of Canada. The Supreme Court agreed with the jury. It noted that: 1) deterrence has been used worldwide where defendants show “reprehensible conduct” or a flagrant disregard for the plaintiff’s rights; 2) deterrence is particularly important where criminal law doesn’t apply; 3) punitive damages should be based on the seriousness of the breach; and 4) for punitive damages to discourage the deliberate denial of good insurance claims, those damages must be large enough to wipe out any profits the insurer might be making from their bad faith actions. (Damages for mental distress are too modest to do so.) In this case, the court decided the punishment of three times the amount of the claim was reasonable.
Since Whiten, a number of awards have been made against insurers for bad faith conduct. One notable follow-up case on a disability insurance claim is Fidler v. Sun Life. A bank employee was diagnosed with chronic fatigue syndrome and was paid benefits for several years, when the insurance company cut off her benefits, claiming that their surveillance showed she had been shopping and doing some errands. For about five years, the insurer refused to produce the tapes, refused to provide any rehabilitation support, and ignored medical evidence supporting Ms. Fidler’s disability. One week before trial, the insurer reinstated benefits. But Ms. Fidler was angry at how she had been treated and went ahead with the trial claiming damages for mental distress and punitive damages. The trial judge awarded $20,000 damages for mental distress. When the insurer appealed this award, Ms. Fidler cross-appealed, and the Court of Appeal added a further $100,000 for punitive damages. The insurer is now appealing this case to the Supreme Court of Canada.
It can be hard for an individual to make a corporation treat him/her fairly. Give credit to our legal system, then, that in the insurance world the demands of dealing in good faith are taken very seriously.
Excerpt from “ACCESS TO JUSTICE: Legal issues for the injured and people with disabilities,” written and produced by Faith Hayman, Barrister and Solicitor.
This is for informational purposes only and its contents are not intended nor should be considered to be legal advice.
Do You Have a Case?
Fill out the form below, and we'll get back to you as soon as possible.
Suite 307 - 100 East Esplanade
North Vancouver, BC V7L 4V1
Telephone: +1 (604) 602-1040
Facsimile: +1 (604)-602-1030
Toll Free: +1 (866)-963-1040