An insurer’s duty of good faith requires that claims be assessed promptly, and in a balanced, competent, and reasonable manner. The scrutiny and challenge of doubtful claims is entirely acceptable and the “[m]ere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.” That said, a coverage assessment is not a competition and the insured cannot be treated like an adversary whose interests may be disregarded.
The British Columbia Supreme Court’s recent decision in Stewart v Lloyds,2019 BCSC 1582, illustrates the above principles in practice and highlights that an insurer's own claims adjusting notes may be probative of bad faith allegations. While the Court found that initial coverage concerns were reasonably well-founded, the subsequent “overwhelmingly inadequate” and “partisan” investigation neglected the insured’s interests. The examiner’s efforts were directed at identifying a “putative basis for denying the claim” and then ending the assessment. Thereafter, the Underwriters reversed their coverage decision, but did not tell the unpaid creditors when they negotiated an “enormous” discount. Norell J. found the entire picture reflected conduct that was reprehensible and egregious. The Underwriters were ordered to pay punitive damages (for bad faith) and aggravated damages (for the insured’s mental distress).
In Stewart, the insured (then 65 years old) procured a policy of emergency medical travel insurance before taking a trip to the United States. The policy excluded indemnity for expenses incurred as a result of the insured’s “abuse of (prior to or during your trip), or intoxication due to alcohol, drugs or medication”. He then traveled to Nevada to attend a recreational golf tournament. After checking in at his hotel, the insured met his friends at a bar where he consumed five beers in five hours. He then went for dinner and drank a martini. The insured had just started a second martini when he passed out and fell to the floor. He was transported to hospital where he remained for 12 days. While in hospital he had a pacemaker inserted and later underwent surgery to his spine. The health care bills amounted to about $293,000 (USD), the greater part of which the insurer refused to pay on the basis of the intoxication exclusion. The insured sued for coverage, also claiming aggravated damages for mental distress and punitive damages for breach of the duty of good faith. By the time of trial, the insurer had admitted coverage and only aggravated and punitive damages were at issue.
In the Court’s view, the Underwriters’ initial coverage concerns were reasonably founded. Emergency consultation notes reflected that the insured had a syncopal episode “at the bar while drinking”; he had alcohol on his breath; he had a prior history of episodic alcohol abuse; and he had once before passed out during an instance of alcohol consumption. The Court concluded: “I find on the basis of the entries in the hospital records that the defendants had a reasonable basis to conclude that [the insured] was possibly intoxicated at the time of the Incident. I find it was reasonable for the defendants to investigate whether this possible intoxication led to the syncope.”
Notwithstanding, subsequent claims handling did not reflect “an objective investigation, taking into account the interests of [the insured], but suggests a partisan approach to the investigation. In the Court’s view the claims notes showed a “surprising willingness to deny coverage without any adequate investigation.” The Court then reviewed the evidentiary record, identifying instances of equivocation with respect to causation by the Underwriters’ consulting physician that were effectively ignored. Finding the investigation did not adequately consider the insured’s interests and was “overwhelmingly inadequate”, Norell J. explained:
… The tenor of two of the log notes suggest that on those occasions there was not a balanced review, but rather a search for a reason to deny coverage. ... They failed to carry out a balanced and reasonable investigation, giving as much attention to [the insured’s] interests as their own. It was as incumbent on them to investigate the non-alcohol related cause as it was open to them to investigate the alcohol related causes. I agree with [the insured’s argument] that the purpose of an investigation is “not to look for a putative basis for denying the claim and then to stop the investigation”. I find that is what happened in this case and for the foregoing reasons, there was an overwhelmingly inadequate investigation….
Years after denying coverage (and in the course of the insured's lawsuit), the Underwriters retained a blood alcohol expert, whose report reflected that the consulting doctor’s initial assessment may not have been well founded. The Underwriters immediately made inquiries and determined the unpaid bills could be settled at a significant discount (i.e. because American creditors understood that coverage had been denied and could not be effectively pursued in Canada). The Underwriters “made the “business decision” to pay the claim and not take these risks and incur the costs of trial.” In the course of negotiations, creditors were not told that the Underwriters had reversed their original coverage decision. The Underwriters received an enormous “uninsured discount” (i.e. they payed about $56,000 of $274,000 owing or “approximately 21 cents on the dollar”).
In the Court’s view, the Underwriters’ behavior was not maliciously directed at the insured, and, taken alone, the overwhelmingly inadequate investigation might not have attracted punitive damages. Nevertheless, the Underwriters’ subsequent conduct in negotiating a colossal discount painted a picture of conduct that was reprehensible and egregious. Norell J. explained:
… The manner of settling the claims, without advising the health care providers that coverage was now granted, appears to have been motivated solely by the economic interests of [the Underwriters], and is reprehensible and the most egregious of the circumstances. …
In this case, a significant factor is the “profit” [the Underwriters] have gained as a result of their denial and the subsequent settlement of these claims. As a result of [the Underwriters] not fulfilling the Insurers’ duty of good faith to conduct an adequate investigation, they denied [the insured’s] claim, a claim for which they have now admitted coverage. When they settled health care bills three and a half years later, they were able to obtain enormous discounts. I find they would not have obtained those discounts if they had admitted coverage in 2015 or advised the health care providers that coverage was granted in 2018. …
If punitive damages are not awarded, the breach of bad faith will be unpunished. [The Underwriters] will have benefited from it because of their denial of coverage and the manner in which they settled the health care claims. …
The Court observed that the Underwriters had “thwarted” judgment by hastily settling the outstanding bills at the last moment, meaning compensatory damages would have little or no denunciating or deterring effect. Considering the benefit that the Underwriters received as a result of their bad faith, the Court ordered punitive damages in the amount of $100,000 and non-pecuniary damages for the insured’s mental distress in the amount of $10,000.
Of course, the Underwriters attempted to leverage an ill-founded denial of coverage into a deep discount of the very indemnity obligations they would have owed had their original coverage assessment been properly undertaken. Given the potential mischief, the Court could not reward or encourage such conduct, which is why punitive damages were warranted. Stewart also illustrates that Courts will consider a constellation of pre- and post- denial conduct when assessing whether bad faith allegations have merit. Claims examiners’ notes are fair game, which the Court may review to ascertain an insurer’s expressed or implied motives. If the evidence reflects that the insurer preferred its own interest over the insured’s (by failing or refusing to undertake a balanced and unbiased assessment); or was motivated to deny coverage as part of a negotiating strategy (i.e. with the insured or with service suppliers), it is reasonably possible that bad faith allegations will hit the mark.