ACCIDENT BENEFITS INSURERS BEWARE: IMPROPER ADJUSTING CAN BE COSTLY Ottawa, January 2014 Opportunistic and premeditated fraud is ubiquitous in the insurance industry, notably in the domain of Accident Benefits ( AB ). Unfortunately, this phenomenon has the ability to expose AB adjusters to the potential risk of adopting a more hardball approach to adjusting their AB claims. The consequence of taking such an approach, if unfounded, is being slapped with a costly award for aggravated damages or a special award (FSCO arbitration), and in an extreme circumstance an award for punitive damages. The Court and Financial Service Commission of Ontario ( FSCO ) are required to frequently review AB adjusters conduct and decide on whether they have breached their duty of good faith toward the insured or if they have unreasonably denied a benefit to the insured. AB Insurers and/or adjusters are repeatedly accused of the following: Breaching the insurance contract by failing to act judiciously in its denial of the claim; Breaching its duty to act reasonably and in good faith; Being unreasonable and unnecessarily causing the claimant significant financial stress, worry and anxiety; Denying the peace of mind benefits that the claimant is entitled to receive pursuant to the contract of insurance; Putting the claimant under surveillance without proper grounds and with an improper motive; Abusing section 42 assessments by frequently using and picking biased examiners to confound the claimant s medical condition; and Failing to process all claims submitted as expeditiously as possible. These are but a few of the hundreds of accusations alleged by the plaintiff bar. On some of these claims, you are damned if you do or you are damned if you don t. For example, one adjuster was being accused of being aggressive in the denial of the claim to scare away 1
the claimant, while also being accused of passively avoiding the claim or claims process. It is a common approach: claim everything and see what sticks! A review of the 2013 case law demonstrates that insurers are still being condemned for breaching their obligation of good faith toward their insureds and/or for unreasonably denying a benefit. Therefore, we can gain some retrospection and avoid certain re-occurring actions that have been condemned by the Courts and the FSCO. However, taking a hardball approach does not necessarily attract damages. For example, the case law demonstrated that insurers can successfully fight back against unfounded claims for breach of their duty of good faith by bringing a motion for summary judgment. What recourses are available to an insured against the Insurance Company and/or Adjuster? The Supreme Court of Canada ( SCC ) decision Smith v. Co-Operators General Insurance Company [2002 SCC 30 ( Smith )] recognized that one of the main objectives of insurance law is consumer protection, particularly in the field of automobile and home insurance. People purchase motor vehicle liability policies to protect themselves from financial and emotional stress and insecurity. Wherefore, the insurer owes the insured a duty of good faith. The duty of good faith requires an insurer to act promptly and fairly when investigating, assessing and attempting to resolve claims made by its insureds. As a result, if an insured feels that the Insurance Company and/or Adjuster ( Insurer ) have breached their duty of good faith toward them or have unreasonably denied a benefit they are able to seek recourse against the Insurer either through a court action for aggravated and/or punitive damages or by seeking a special award within the context of a FSCO arbitration. Punitive Damages In the leading SCC decision Whiten v. Pilot Insurance [2002 SCC 18, ( Pilot )], an insured sued her home insurer for damages for destruction of her house by fire. The insurer advanced the defence of arson. Even though it had no evidence to support this theory and the evidence was all to the contrary. In Pilot, Justice Binnie stated that a breach of a contractual duty of good faith is independent of and in addition to the breach of a contractual duty to pay the loss. Therefore, an independent actionable wrong must be established. As evidenced by the case law, punitive damages are very much the exception, and not the rule. Consequently, they are only imposed if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour. For example: planned and/or deliberate misconduct in the treatment of the insured; an intent and motive in the treatment which is contrary to the duty; persistent and prolonged outrageous conduct; attempts or acts on the part of the insurer to hide misconduct; an awareness on the part of the insurer as to its bad behaviour; the insurer profiting from the behaviour, and; the irreparable violation of a deeply personal interest of the insured. Furthermore, punitive damages are meant to punish the wrongdoer. Although, punitive damages are not the norm, they were awarded with respect to a disability insurance policy in the recent decision of Fernandes v. Penncorp Life Insurance Co./LaCo. D Assurance-Vie Penncorp [2013 CarswellOnt 3163, ( Fernandes )], in the amount 2
of $200,000. The Court found that the insurer had breached their duty of good faith by denying coverage or delaying payment in order to take advantage of the insured s economic situation or to gain bargaining leverage in negotiating the settlement. In addition, it was found that the adjuster had taken an adversarial approach to the claim and did not deal with it fairly or in a balanced way. Aggravated Damages AB Insurance contracts fall within the category of peace of mind contracts, which means that AB insurers are subject to being awarded aggravated damages against them for causing their insured mental distress. Not all mental stress is compensable, it has been established that incidental frustration does not qualify. The leading SCC decision for aggravated damages is Fidler v. Sunlife Assurance Co. of Canada [2006 SCC 30, ( Fidler )]. In Fidler, aggravated damages were upheld by the SCC and it was clarified that there were two types of aggravated damages: (1) those that arise out of aggravating circumstances (an independent cause of action) and (2) those that arise out of the contractual breach itself (peace of mind the parties expectations at the time of the contract formation). Therefore, aggravated damages are available as additional compensation if the insured can establish that the contract has a piece of mind component and that the mental distress was of such a magnitude to justify compensation. In Fidler, it was found that Ms. Fidler genuinely suffered significant additional distress and discomfort arising out of the loss of her disability coverage for a five year period. As evidenced by the above, the criteria for an award of aggravated damages is less stringent than what is required for an award of punitive damages. The recent Ontario Court of Appeal decision, McQueen v. Echeleon General Insurance Co. [2011 ONCA 649 ( McQueen )] upheld an award of $25,000 in aggravated damages. In McQueen, it was found that from the very beginning the insurance company demonstrated an adversarial approach toward their insured. For example, the Court found that the expressions in the insurer s internal notes connoted an outmoded attitude. As a result, in behaving in this manner the insurer breached its contract of insurance with the plaintiff. Additionally, it was noted that the insurer s adversarial position poisoned the process from very early on. Interestingly, in the 2013 decision Blake v. Dominion of Canada General Insurance Co. [2013 CarswellOnt 13619], the Court found that the insured was not entitled to aggravated damages as no medical evidence of compensable distress was demonstrated. In addition, it was stated that frustration, which is inevitable in life, does not constitute compensable mental distress. Special Award Similarly, in FSCO arbitrations, special damages are available to punish insurers that unreasonably fail to pay accident benefits promptly as per section 282(10) of the Insurance Act. Note that the power to make a special award is given only to an arbitrator and it is a matter of the arbitrator s discretion. In Plowright v. Wellington Insurance Co. [1993 CarswellOnt 4786], it was determined that unreasonable behavior by an insurer could be seen as excessive, imprudent, stubborn, inflexible, unyielding or immoderate. The standard of reasonableness has been interpreted as making decisions based on the best 3
available evidence. In the recent appeal decision of Hoang (Litigation Guardian of) v. Personal Insurance Co. of Canada (FSCO, Docket: P11-00025) it was confirmed that an insurer had a responsibility to "carefully consider all of the available information, giving appropriate weight to that information in a fair and even-handed manner" as well as to "reassess the validity of the claim as new information is received. It is important to note that an insurer is not held to the standard of perfection, insurers are entitled to make mistakes. The recent Ontario Court of Appeal decision, Zacharias v. Zurich Insurance Co. (2013 ONCA 482), demonstrates that interest is available to compensate claimants for an error made by the insurer whereas a special award is available to penalize the insurer. It is clear that the criteria for not only punitive damages, but also aggravated damages goes considerably beyond unreasonableness. Therefore, it is no surprise that awards for special damages are more common place in the domain of AB claims. Is your conduct deserving of punishment or condemnation? Here are some examples (courses of actions taken by the adjuster/insurer) which resulted in condemnation by the Courts and/or FSCO: The adjuster failed to provide any home modifications when it was clear that the claimant was constantly falling within the home and needed assistance; The adjuster failed to recognize the obvious. The Court carefully reviewed and scrutinized the internal email exchanges as between the adjuster and her supervisors. It found that there was ample evidence to conclude that the claimant was entitled to benefits; The adjuster failed to properly look after the claimants needs; The adjuster failed to remedy the situation in a timely fashion and lacked the taking of action; The adjuster failed to provide the claimant with assistive devices despite a recommendation of the expert that it was needed to insure safe mobility within the home; The adjuster failed to discharge his responsibility of ensuring that the claimant s needs were met. The Court found that rather than writing long and elaborate reports internally, there was an immediate need for action on the part of the adjuster; The adjuster was more interested in saving her employer money than giving the claimant peace of mind as guaranteed by the insurance contract; The adjuster simply obtained more and more medical opinions when such a course of action was not required. The Court found that the adjuster caused damages to the claimant by delaying the inevitable; 4
The adjuster s file notes are evidence of an adversarial approach to the claimant s claim. The Court found that the following entries were troublesome: the claimant is expecting great things from her claim; she has retained a lawyer; the lawyer is not the easiest to deal with ; The adjuster had a negative pre-disposition toward the claimant and the adversarial position taken by the adjuster poisoned the process very early on; The adjuster failed to give the claimant the benefit of the doubt as to the reasonableness and necessity of a benefit; The adjuster delayed the claimant s access to psychological assessments and treatments by way of unsubstantiated denials; The adjuster inappropriately terminated income replacement benefits and housekeeping benefits when its own assessor opined that the claimant was unable to work and would have difficulty with certain tasks; and The adjuster incorrectly relied upon two questionable reports from assessors on the claimant s ability to return to reasonably suitable alternative employment. What recourse is available to the insurer for an unfounded claim of breach of good faith? In the recent 2013 decision, Spadafor v. The Dominion of Canada General Insurance Company [2013 ONSC 182 ( Spadafor )], a Superior Court judge granted the insurer s summary judgment motion to dismiss claims for breach of a contract of insurance, damages for wrongful infliction of mental distress, damages for bad faith on the part of the defendant insurance company and aggravated and punitive damages in the amount of $100,000. Spadafor is noteworthy because it demonstrates that insurers do have a recourse against unfounded allegations that they have breached their obligation of good faith. In addition, as demonstrated by Spadafor insurers should not shy away from bringing a motion for summary judgment if there is no evidence to support such a claim. Which may result in a decrease in Statement of Claims pleading damages for wrongful infliction of mental distress and/or damages for bad faith on the part of the insurer. Conclusion Due to the nature of automobile insurance, as stated in Smith, it is no surprise that the Courts and FSCO are required to frequently review AB adjusters conduct and decide on whether they have breached their duty of good faith toward the insured or if they have unreasonably denied a benefit to the insured. The case law demonstrates that insurers are able to make mistakes. For instance, an isolated error in the processing of a claim will not necessarily be illustrative of bad faith. That said, the trend nonetheless appears that AB adjusters are being held to a much higher standard than before. However, this should not sway AB adjusters from taking a hardball approach when warranted, because it is a known fact that fraudulent claims are on the rise. Therefore, in order to avoid the likelihood of 5
being slapped with a costly award, AB adjusters should ensure that they: act promptly, fairly, in a well-reasoned manner and consider all of the available evidence. Additionally, it is paramount that AB adjusters not forget that all actions taken with respect to a claim, including internal notes and emails, will be scrutinized to their detriment. About the Authors Marc E. Smith Marc is a founding principal of the law firm Forget Smith Morel (www.forgetsmith.com) and his practice is comprised primarily of insurance defence, including bodily injury, accident benefits and property damage as well as subrogated actions. Charlotte Porter Charlotte is the newest associate to join Forget Smith Morel and her practice is principally focused on insurance defence, including bodily injury, accident benefits and property damage. 6