In 2014, the Supreme Court of Canada in Bhasin v. Hrynew recognized good faith as the general organising principle of the common law of contract and that the duty of honest performance of a contract was a manifestation of the general organizing principle. This holds true in the insurance realm and this duty of an insurer applies to both the manner in which it investigates and assesses the claim and to the decision whether or not to pay it.
In dismissing a summary judgment motion by the insurer, the Manitoba Court of Appeal has recently reviewed the case law and commented that where an insurer unfairly engages in lowballing an insured to obtain an economic advantage in settling a claim, bad faith has been established. In this situation, it was necessary to hear evidence at trial as to motive and intent by the insurer in order to decide if the insurer acted fairly in putting forward a “lowball” offer.
In 3746292 Manitoba Ltd. v. Intact Insurance Co., 3746292 Manitoba Ltd. (374) is the owner of land upon which is situated a mixed commercial and multiunit residential complex (the Property). The land was leased by 374 to Cityscape Residence Corporation and a portion of the Property was leased to The University of Manitoba. Intact Insurance Co. (Intact) provided a policy of insurance (the Policy) to “Cityscape Residence Corporation o/a 374 Manitoba Ltd.” for the Property with a limit of $28,668,000. The Policy contained a co-insurance provision such that, if the property was not insured to at least 90 per cent of the its value, the insured would be self-insured for a proportion of any loss. A valuation done by the plaintiffs in the spring of 2010 showed that the Property was underinsured by over $40 million, meaning any loss would result in a substantial co-insurance penalty for the plaintiffs. The University of Manitoba had separate insurance for loss suffered to its rented space.
On August 24, 2010, a fire occurred at the Property, and the plaintiffs made a claim against Intact under the Policy. Intact retained ClaimsPro Inc. (ClaimsPro), an independent adjusting firm to adjust the plaintiff’s loss. MKA Canada Inc. (MKA), a construction consulting firm, was retained to provide assistance to ClaimsPro in the adjustment of the loss. Cityscape retained Les Entreprises de Renovations S.R.G.M. Inc. (SRGM) to act as its consultant in respect of the loss, including the provision of assistance in advancing its claim against Intact under the Policy.
In November of 2010, MKA provided a preliminary conceptual estimate to ClaimsPro that the loss suffered to the Property was approximately $2.5 million with $850,000 of that amount attributable to the university’s space. ClaimsPro relied on MKA opinion and reported that to Intact. However, in December of 2010, ClaimsPro provided SRGM with an estimate of $755,031.36 (exclusive of the university’s space) for the cost of repairs. The plaintiffs only learned about MKA’s preliminary estimate of the cost of repairs during the discovery phase of litigation.
There were significant differences that arose between MKA and SRGM as to the estimated costs of repairing the damage as well as in the replacement cost valuations of the Property as it stood prior to the fire, differences which made the application of the co-insurance clause more difficult.
In the summer of 2011, ClaimsPro, on behalf of Intact, made two offers to settle the claim based on a cost of repairs to the Property (exclusive of the university’s space) in the amounts of $1,414,278.52 and $1,501,973.83 respectively, both of which were rejected. In November of 2011, the plaintiffs provided Intact with a signed proof of loss in the amount of $1,264,406.23, the calculation of which was based on a lower co-insurance penalty than proposed by Intact and also SRGM’s higher estimate of the cost of repairs for the Property (exclusive of the university’s space). The proof of loss was initially rejected by Intact, and in December of 2011, Intact attempted to settle the claim for a lower amount than what the plaintiffs had requested. The plaintiffs responding by making a counter offer of $1,264,406.25 as compensation for damages to the Property under the Policy.
After further discussions, Intact offered to pay $1,407,837.00 and settlement of the claim was finally effected on February 27, 2012. The proof of loss upon which the settlement was based contained a clause that provided “In consideration of such payment the Insurer is discharged forever from all further claims by reason of the said loss or damage….”. Notwithstanding having signed the release, the plaintiffs commenced an action against Intact and MKA claiming monies under the Policy and in addition, claiming that Intact had breached its duty of good faith and fair dealing to the plaintiffs in performance of its obligations under the Policy and its administration of the plaintiffs’ claim.
Both Intact and MKA moved for summary judgment of the claims against them. The motion for summary judgment filed by Intact relied on two grounds. Namely, that the plaintiffs had released Intact from all claims, including claims of bad faith, and that the evidence indicated that the complaints of the plaintiffs about bad faith were not sustainable.
The motions judge dismissed Intact’s motion for summary judgment, holding that there was a genuine issue for trial against Intact. According to Justice Dewar, a reliable decision could not be made as to the allegation of bad faith, based solely on the affidavit materials, without a trial. There was no evidence before him explaining the reason why ClaimsPro advised SRGM that the amount of the claim, not including the university’s space, was approximately 55 per cent lower than what MKA had estimated it to be about three weeks earlier. Justice Dewar further found that in the circumstances, the language of the release was potentially capable of at least two interpretations and that the interpretation of that clause ought to better left for trial when a court might more fairly impose an interpretation upon it, having been given more information as to the circumstances surrounding its execution.
Intact appealed the decision, but the lower court decision was affirmed by the Court of Appeal. The Court of Appeal noted that an insurer is obligated in the claims-handling process to be even-handed by giving equal consideration to the interests of the insured as to its own interests. Practically, for an insurer, even-handedness in the claims-handling process means that an insured is not an adversary. The insured is entitled to correct information, a fair interpretation of the policy, a timely and balance assessment of the claim based on its objective merits and prompt and full payment of a valid claim.
The Court further noted that given the complexities that often arise in assessing an insurance claim, an insurer is permitted to fairly debate the claim, and its amount, provided it acts reasonably. In order to establish a breach of an insurer’s duty of good faith, more must be shown than simply that errors occurred in the claims-handling process. A successful action requires proof that there was no reasonable basis in law or fact to deny benefits and that the insurer knew or ought to have known that to be the case. The Court specified that tell-tale signs of bad faith by an insurer are when the handling of the claim was overwhelming inadequate or there was an introduction of improper considerations into the claim process.
The Court went on to say that, while an insurer is not required to any settlement within a policy’s limits, the duty of good faith requires it to take reasonable steps to protect an insured’s interests in settling the claim on objectively reasonable terms. Accordingly, where an insurer unfairly attempts to lowball a settlement from an insured, it is not acting even-handedly; rather, it is acting in bad faith because it is placing its own interests over those of its insured. An insurer cannot use its economic advantage or the insured’s economic weakness to obtain a favourable settlement.
On the other hand, the Court noted that central to the reciprocal duty of good faith between an insurer and insured is a mutual duty of cooperation in the claims-handling process. The Court cautioned that the insurers conduct has to be viewed in light of the fact that it attempted to settle the claim, it advanced monies without receiving the required proof of loss and it was dealing with an insured who was significantly underinsured, and therefore, may have had an incentive to inflate the estimate cost of repairs to reduce the effect of the co-insurance penalty.
Ultimately, the Court of Appeal held that the motion judge’s exercise of discretion to require a trial was reasonably supported by the inferences that may be drawn from the unexplained and sizeable discrepancy at the commencement of the adjustment process between what the plaintiffs were told the expected cost of repairs would be, and what the insurer and its agents actually reasonably believed it was given the advice of MKA.
As a result of this decision, an insurer may be held in breach of their duty of good faith under an insurance contract where it is found that they have unfairly engaged in lowballing an insured in settling a claim. Insurers should think twice before making a settlement offer that can be construed as low on the evidence before it as to the claims value. It is to be remembered that an insured is not to be considered an adversary during the claims process, and that the insurer’s duty of good faith involves the insurer giving equal considerations to the interests of the insured as to its own interests.