Of Red Flags and
Good Faith
Steve Scullion BSc, FCIP, FCIAA, FCLA, CRM, DipAdEd
An adjuster’s job is to…
…properly indemnify the insured as per the provisions of the
insurance contract.
However, how (and when) we communicate, convey and apply these
provisions to a claim separates good adjusters from, well, not so
good adjusters. Failure to do so may lead to the actionable claim of
bad faith against the adjuster and/or insurer.
We will be discussing primarily property claims in this lecture but this
concept holds true for any type of insurance.
2
Legal Definition of Good Faith
“…there is an implied covenant of fair dealing
in every contract that neither party will do
anything which injures the right of the other
to receive benefits of the agreement.”
(Comunale v Traders & General Ins. Co.
California Superior Court 1974)
Kogan v. Chubb Insurance of Canada
(OSCJ,2001)
Justice Forget’s 5 Commandments of Good Faith
1. The obligation of good faith implicit in
any contractual relationship is to refrain
from nullifying without reasonable
justification the reasonable expectation of
the other party created by the contract.
Justice Forget’s 5 Commandments of Good Faith (cont.)
2.The insurer owes the insured a duty of fairness and a duty
to be prompt in handling and assessing the loss.
3.The insurer owes the insured a duty of fair dealing which
includes payment in a timely fashion. Failure to do so may
constitute a breach of the contract.
4.In fulfilling its contractual obligations, an insurer must give
as much consideration to the insured's welfare as it gives
to its own interests. The insurer cannot do anything to
injure the insured's rights to receive the benefits under the
policy.
Justice Forget’s 5 Commandments of Good Faith
(cont.)
5. The insured is dependent upon the insurer to undertake an
adequate investigation and proper evaluation of a claim
expeditiously. An insured is entitled to receive correct
information, a fair interpretation of the policy and the prompt
payment of a meritorious claim. The insurer may not treat the
insured as an adversary whose interests may be
disregarded. This implies the reasonable and competent
investigation of the claim.
Where 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 in order to draw a reasonable
conclusion therefrom, the label of bad faith will be justified
and punitive damages should be awarded.
A Few Words on Adequate Investigation…
McDonald v. Insurance Corporation of British Columbia,
2012 BCSC 283
Insured involved in an auto accident and charged with refusing to
provide breath sample.
In B.C. this is grounds for nullifying liability coverage (not in Ontario).
The insurer paid BI claim under absolute liability provisions and started
action against the insured to recover.
Adjuster relied on criminal investigation; insured pleaded guilty to lesser
charge and impaired/breath sample charges stayed.
Insured started action against insurer claiming bad faith due to
inadequate investigation which lead to an untenable decision to deny
liability coverage.
Court agreed and levied $75,000 punitive damage claim against
insurer-even in the absence of malicious intent.
To avoid claims files working against you in a
bad faith suit…
1. Do not let the plaintiff attorney see your file or at least parts
of it by claiming legal privilege (litigation or solicitor/client)
or,
2. Be aware, diligent and proactive so that your file is your
strength and not your weakness.
To be safe…
…work on the very real possibility that your file contents
will be seen by the whole world.
This will force you to keep a tight file with limited
opinions in it and it will also guide your conduct as you
investigate.
Know the Duties and Rights of the Insurer and Insured:
The Statutory Conditions
1. Misrepresentation (Statutory Condition #1)
2. Material Change (Statutory Condition #4)
3. Requirements After Loss (Statutory Condition #6)
4. Fraud (Statutory Condition #7)
5. Entry, Control and Abandonment (Statutory Condition
#10)
6. Appraisal (Statutory Condition #11)
7. When Loss Payable (Statutory Condition # 12)
8. Replacement (Statutory Condition #13)
9. Action (Statutory Condition # 14)
Lord Denning (Blater v. Blater, 1950)
The case may be proved by a preponderance of probability,
but there may be degrees of probability within that standard.
The degree depends on the subject matter. A civil court,
when considering a charge of fraud, will naturally require a
higher standard of probability than that which it would
require if considering whether negligence were established.
It does not adopt so high a degree as a criminal court, even
when it is considering a charge of a criminal nature, but still
it does require a degree of probability which is
commensurate with the occasion.
Correlation ≠ Causation
or
Red Flags Mean Nothing
Real Investigations Rely on True Evidence
A priori thinking-justification of a preconceived idea by reviewing
evidence; a general rule is applied to a particular circumstance;
ideas not based on experience; insureds who have these red flags
have fraudulent claims i.e. use of deductive reasoning.
A posteriori thinking-an idea is conceived after collection of
evidence; particular circumstances are applied to a general rule;
ideas based on experience; arson triangle must be looked for i.e.
use of inductive reasoning.
Adjusters must always think a posteriori. The evidence collected,
and it alone, tells you what to think. If you preconceive, bad faith is
sure to follow.
Fraud will never be proven…
…by the amount claimed for indemnity alone.
The courts expect that the insured will attempt to maximize
their indemnity and will allow “puffery”. Think “optimism”
rather than fraud.
An adjuster is expected to actually “adjust” the indemnity
claimed and arrive at the proper level of indemnity owed.
The Arson Triangle
1. There must be incendiary origin for the fire,
2. The insured had or could give the ample or exclusive
opportunity to set the fire and
3. There must be a motive for the setting of the fire.
The purpose of the investigation is to investigate if arson
has occurred-not to prove that it has.
When contemplating the denial of a first party claim based on
fraud, remember these issues:
1. Think like the other side.
2. Do not rely heavily on minor items.
3. Stretch coverages, not exclusions; exclusions will be
interpreted narrowly and coverage will be given broadlyas will other aspects of the insurance contract e.g.
insurable interest (9111-1963 Québec Inc. v. Compagnie
d’assurances Temple Inc., 2010 QCCS 4074).
New Ideas?
“Either the party who has a defence to make, based on
allegations of fraud, can prove them or it cannot; we must
assume that it has normal discretion and prudence, and is
able and prepared to ensure its means of defence in
advance. If it can prove them, it can boldly allege them, and
its opponent will bear the consequences; if it cannot prove
them, why make such allegations? It is a pure loss for the
case; it is useless… it is slander.”
Picaud v. Price (1870)
Fidler v. Sun Life Assurance Co. of Canada
S.C.C. 2006
While a breach by the insurer of its contractual duty to act in
good faith could constitute an independent actionable wrong,
an insurer will not necessarily be in breach of the duty to act
in good faith by incorrectly denying a claim that was
eventually conceded, or judicially determined, to be
legitimate. The trial judge's conclusion was the product of a
thorough review of the evidence and depended heavily on
the basis on which the insurer denied the claim. The trial
judge did not find that the insurer had an improper purpose,
but rather that its denial of benefits was the product of a real,
albeit incorrect, doubt as to whether the insured was
incapable of performing any work.
702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd's
London, England (2000)
“What constitutes bad faith will depend on the
circumstances in each case. A court considering whether
the duty has been breached will look at the conduct of the
insurer throughout the claims process to determine whether
in light of the circumstances, as they then existed, the
insurer acted fairly and promptly in responding to the claim.”
J.A. O’Connor
The Adjuster’s Motto:
I will properly indemnify the insured for this claim
unless, through the gathering of enough legitimate
evidence required by the circumstances and
gathered as expeditiously as is practicable through
an unbiased investigation, I am prevented from
doing so by the provisions of the contract that
exists between the insured and the insurer.
Sample Denial Letter
“Sir/Madame;
We regret to inform you that coverage cannot be extended for your loss
of _______.
Our detailed investigation has led us to the conclusion, based on a
higher level than the balance of probability, that an event has occurred
which disallows coverage. Specifically, a breach of section (XX) of the
“Loss or Damage Not Insured” section of your policy has been
committed:
We do not insure loss or damage:
(XX) resulting from intentional or criminal acts or the failure to act of any
person insured by this policy and any other person at the direction of any
person insured by this policy.
As a result of this breach, we are obliged by the contract of insurance
that exists between us to impose the consequences mandated by such a
breach.
Regards,”
In Conclusion…
…to arrive at the proper indemnity owed and avoid
bad faith, an adjuster and insured must…