Yes, your insurer is obligated to deal with your insurance claim in “good faith”. What does that mean?

When you purchase any insurance policy such as extended medical, travel, auto, or homeowners, your insurance company is required to deal with you fairly when you make an insurance claim for benefits under your policy.

An insurer is not obligated to pay out on an insurance claim in every situation, however, if they decide to refuse your claim, they must assess it fairly and reasonably and cannot deny coverage for arbitrary reasons, such as taking advantage of your vulnerability or gaining leverage in settlement negotiations. This obligation to assess a claim fairly is legally known as “a duty of good faith” and it exists in every insurance contract whether written in the contract or not.

What happens when an insurer unreasonably refuses to pay out on a claim? One option is to file a claim against the insurance company for breach of the duty of good faith and seek damages. Recently, the BC Supreme Court awarded punitive damages against insurers who failed to fairly investigate a claim before denying coverage.

In Stewart v Lloyd’s Underwriters, 2019 BCSC 1582, a gentlemen was injured while on vacation in the US and made a claim through his travel insurance policy. The insurer initially denied coverage, citing alcohol consumption as the cause of his injuries. The court was critical of the insurer’s approach to the investigation of his injuries and found their approach was essentially a search to find a reason to deny coverage:

[75] In considering the entire history of the investigation, I find that the defendants did not meet the Insurers’ duty of good faith and fair dealing to Mr. Stewart. There was almost no consideration of the information obtained by Dr. McMorran. When Dr. Stahl told Ms. Zacks and Ms. Cockeram he did not understand why the trauma physicians would say that alcohol was not a factor, they did not ask him to make inquiries, or do it themselves. The defendants did not speak with Mr. Stewart or patrons or employees of the bar, and as a result they appear to have been under some misapprehension regarding the sequence of events of the fall. There was no further follow-up to obtain the incident report, if it was available. The written opinion of Dr. Stahl only identified possible causes. The subsequent conversations with Dr. Stahl, taken together, indicated the defendants needed to do further investigation. Ms. Zacks admitted there was no investigation of the third possibility for the cause of the syncope – that is, that Mr. Stewart’s heart condition alone caused the syncope. They did not attempt to speak with the cardiologist in Reno. If Dr. Stahl had any difficulty in obtaining information from a physician, the defendants could have obtained Mr. Stewart’s consent to receive that information. The Insurers have a right under the Policy to obtain medical information. They did not retain a cardiologist. 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. When Mr. Stewart’s counsel pointed out the errors in the calculation of the BAC, the defendants did not obtain a toxicology opinion for two years. While I find it was reasonable for the defendants to conclude that the syncope was possibly directly or indirectly a result of intoxication, the information fell short of them being able to reasonably conclude that the syncope was probably directly or indirectly a result of intoxication. They failed to carry out a balanced and reasonable investigation, giving as much attention to Mr. Stewart’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 argument of Mr. Stewart 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.

More troubling than the insurance company’s investigation into the plaintiff’s injuries was their settlement of his outstanding medical bills. As a result of his stay in the hospital in the United States, the plaintiff incurred significant medical expenses in excess of $250,000 USD. While the insurer eventually changed their position and admitted coverage, they did not inform the hospital and other medical services providers that the claim was insured and instead settled the plaintiff’s medical bills for a paltry $56,429.81. The judge inferred that the insurance company had obtained the deep discounts on services based on their mistaken believe the plaintiff was still uninsured.

The court decided to award him $100,000 in punitive damages against the insurance company. Punitive damages are rare and only imposed in situations where there has been high-handed, malicious, arbitrary or highly reprehensible misconduct. The fact the insurer had gained a profit in the form of deeply discounted settlement of medical bills as a result of their initial arbitrary denial of coverage was found to be a breach of good faith that should not go unpunished.

[115] In this case, a significant factor is the “profit” the Insurers have gained as a result of their denial and the subsequent settlement of these claims. As a result of the defendants not fulfilling the Insurers’ duty of good faith to conduct an adequate investigation, they denied Mr. Stewart’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. The uncontroverted evidence was that the typical discount was 20%. If Mr. Stewart’s claim had been honoured, it is likely based on Ms. Carey’s and Ms. Zack’s evidence, that the health care claims would have been settled for approximately $219,000 US (274,000 x .80). Instead, they settled the bills for approximately $56,000 US and received a $162,000 US or roughly $214,000 CDN benefit.

[
116] If punitive damages are not awarded, the breach of bad faith will be unpunished. The Insurers will have benefited from it because of their denial of coverage and the manner in which they settled the health care claims. They have thwarted any judgment on the Policy against them by hastily settling bills or confirming they were at “zero balance” at the last moment, in disturbing circumstances. Any compensatory damages that might be awarded in this case, such as a claim for mental distress, which is typically moderate, would be insufficient to satisfy the objectives of retribution, deterrence and denunciation.

In another case, Greig v Desjardins Financial Security Life Assurance Company, 2019 BCSC 1758, a plaintiff was injured in a car accident and returned to work 2 years later. He was injured again while at work and made a claim through WorkSafe BC. His WorkSafe claim was denied on the basis that work injury was an aggravation of his existing car accident injury. He applied for Long-Term Disability Benefits through his union insurer. After initially being granted coverage, the insurer terminated his benefits for a 17 month period causing him to lose his home and fall into dire financial straits. He filed a lawsuit against the insurer and was awarded $200,000 in punitive damages and $50,000 for mental distress.

The court was exceptionally critical of the insurer’s investigation of the Long-Term disability claim, finding that despite being provided with relevant medical information, the insurer took no action except for litigation steps.

[166]     Both Ms. Yee and Mr. Baksh confirmed that they had a duty to adjudicate Mr. Greig’s claim, yet they failed to adjudicate upon or even acknowledge the plaintiff’s medical appeal. They failed to take investigative steps in relation to his benefits, such as seeking a medical examination.

…

[168]     This is certainly not what happened here. In this case, the plaintiff’s counsel continued to provide Desjardins with additional medical information on an ongoing basis following the termination. Desjardins did not acknowledge the additional information, respond to the plaintiff’s counsel, or apparently take any action in relation to Mr. Greig’s appeal until Ms. Bauzon took carriage of the file.

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[250]     I find that Mr. Baksh’s exclusive focus on the litigation process and ignoring the plaintiff’s file and the new medical evidence that was being submitted by the plaintiff’s counsel is high-handed, arbitrary, and worthy of rebuke. The plaintiff requested a reconsideration and a medical appeal and was ignored for months. As a result of this high-handed conduct, the plaintiff suffered egregious harm.

Despite having an obligation to deal fairly with any claim, the sad fact is many insurers simply look for a reason to deny coverage which can jeopardize your medical recovery if you can’t afford treatment out of pocket or put you at financial risk if you’ve been denied wage loss benefits. If you feel your insurer has denied coverage or acted unfairly in dealing with your claim, its important to talk to a lawyer to make sure you understand your rights.