BAD FAITH OR BAD CLAIM: A CASE STUDY ANALYSIS

BAD FAITH OR BAD CLAIM: A CASE STUDY ANALYSIS Annual Toronto Fraud Forum, Association of Certified Fraud Examiners, Toronto Chapter, & Canadian Association of Special Investigation Units Toronto, Ontario, September 20, 2012 Reid Lester Laishley Reed LLP

Case Study: Poetry in Motion Applied for property insurance in August 2010 Application: No previous policies No previous losses (last 5 years) No previous cancellations Principal: B. Yeltsin

Details: Business: taxidermy of exotic animals conducted at principal s s address in Barrie Business was unincorporated: Poetry in Motion was newly registered as business name Principal obtained skins and hides of exotic animals on safari in Asia and stored them in freezers at premises

Details (con (con t) Alarm system in place with notification feature $500K - $700K in revenues yearly 4

Meanwhile, we subsequently learned: In March 2010, Yeltsin had applied for insurance under a different business name: Pride of Asia Used a different broker for this application Disclosed on application large loss ($500K) paid in May 2009 Insurer had declined this risk

Meanwhile, we subsequently learned (cont (cont d): Pride of Asia was essentially the same business Same location, same equipment Previous loss occurred when freezer equipment failed and pelts spoiled Later investigation revealed yet another loss from two years earlier spoiled pelts due to equipment malfunction

Notice of Loss July 10, 2011, insured gave notice of loss he had been away up north and returned to find that freezer had malfunctioned and pelts had spoiled Alarm system had failed didn t t alert insured or his agents Difficult to quantify value of pelts since no market to replace them in Canada. Could only obtain pelts in Asia on safari

Issues at First Instance Causation issues: why did alarm system fail? Quantum issues: how to place value on pelts that couldn t t be replaced in Canada? Material misrepresentations? Difficult insured

Duty of Utmost Good Faith Insurer has duty to act fairly and in utmost good faith upon receipt of claim Violation of this duty = bad faith Can arise in first party or third party claims Duty arises out of the policy, but can be independent tort (adjusters too?) [McDonald v. ICBC, 2012 (BCSC)]

Guidelines for Good Faith Handling of a Claim 1. Be prompt in handling, assessing claim 2. Perform balanced and reasonable investigation 3. Assess merits of the claim in balanced and reasonable manner 4. Give as much consideration to the interests of the insured as to insurer s own interests

Guidelines for Good Faith Handling of a Claim (cont (cont d) 5. A want of reasonable care suggests an absence of good faith 6. What constitutes bad faith will depend on the circumstances of each case [Bullock v. Trafalgar Insurance (1996) Ont. Gen. Div.]

Other Thoughts Full, open communication with insured Put in writing issues regarding coverage or facts; give insured chance to respond Always include reservation of rights disclaimer Keep a leash on adjusters re coverage issues

Is it Bad Faith? 1. An insurer s s incorrect denial of a claim will not necessarily mean bad faith. Need to consider circumstances of each case [Fidler v. Sun Life, SCC, 2006] 2. Insurer likely has no obligation to notify insured of the imminent expiry of a limitation period (though, in BC, this may soon change) [Esau v. Co [Esau v. Co-operators operators (2006) BCCA]

What is Producible if There is Litigation? Claims file Expert s s reports? Adjuster s s reports? Legal communications? Most material will likely be producible. Reluctance to share such information created prior to denial will justifiably be viewed with suspicion

Privilege? Litigation privilege: dominant purpose test But, no reasonably anticipated litigation until decision made to deny Solicitor-Client privilege: may not be sufficient to shield all communications (unless purpose was to receive legal advice )

Privilege? (con (con t) If insurer cites legal advice in denying claim, this could result in waiver of privilege [Gen Acc. v. Chrusz, Ont. CA, 1999]

Material Misrepresentations Insured has duty of utmost good faith and must disclose all material facts. If not, insurer may void the contract Material if it would influence a prudent insurer re whether to issue a policy or in determining amount of premium Insurer must lead underwriting evidence of materiality

Material Misrepresentations (cont (cont d) Duty to disclose material facts exists even in the absence of questions from insurer on application But, if insurer fails to ask a question, it will be more difficult to argue later that this undisclosed info was material [Sagl v. Chubb Insurance, 2009, Ont. CA]

Application to Case Study 1. Issues: i. Were there material representations? ii. Did insurer create the loss himself (i.e. was the claim fraudulent)? iii. Quantum issues iv. How to navigate thorough claim so as to limit risk of bad faith claim?

Application to Case Study 2. Considerations/Factors: i. Aggressive, difficult insured ii. Demands for advance payments iii. Evidence of material misreps iv. Factual issues regarding alarm system and replacement cost of spoiled pelts v. Fraud can be difficult to prove; litigation is always uncertain

Application to Case Study 3. Approach: i. Conduct thorough and prompt investigation with external adjuster, engineer and eventually accountant ii. Taped interviews: Insured [not EUO ], alarm company iii. Bland objective communications to insured to advise of next steps, request assistance, request documents

Application to Case Study 3. Approach (cont ): iv. Take care with tone of internal emails v. Retain legal counsel to provide strategic guidance vi. Conduct investigation of insured s history vii. Once investigation well underway, write to insured with concerns and with follow-up questions

Application to Case Study 4. Developments i. Insured tried to divide and conquer ; clarified in writing the roles of parties ii. Insured stingy with documents iii. Insured refused to produce financial information iv. Claim investigation stalled v. Underwriting investigation concluded and legal opinion prepared

Application to Case Study 5. Final Letter to Insured i. Set out: a) Factual concerns and questions b) Concerns regarding possible misreps c) Lengthy list of follow-up questions (objective tone). ii. Letter requested that insured provide sworn POL [so as to commit the insured to a particular story]

Result/Lessons Insured never responded to letter (apparently went away) By proceeding carefully and thoroughly, we left no room for insured to complain All written communications (internal and external) were neutral in tone Could we have voided immediately? Yes but it s s risky if investigation has not been carried out

QUESTIONS Reid Lester Laishley Reed LLP 505-3 3 Church Street Toronto, ON M5E 1M2 Tel: 416.981.9415, Fax: 416.981.0060 Email: rlester@laishleyreed.com www.laishleyreed.com

Thank you! Reid Lester Laishley Reed LLP 505-3 3 Church Street Toronto, ON M5E 1M2 Tel: : 416.981.9415, Fax: 416.981.0060 Email: rlester@laishleyreed.com

Reid Lester, Laishley Reed LLP 505-3 3 Church Street - Toronto, ON M5E 1M2 Tel: 416.981.9415 o Fax: 416.981.0060 o Email: rlester@laishleyreed.com Background Reid Lester is a Partner at the firm of Laishley Reed LLP, in Toronto. Mr. Lester was admitted to the Ontario bar in 1990 after graduating from Queen's University with a Bachelor of Laws in 1988. He received a Bachelor of Arts in Economics (Honours) from the University of British Columbia in 1981, and a Masters of Arts in Economics from Queen's University in 1982. He also worked as an Economist in Ottawa for 4 years from 1983 1987 before completing his law degree. Mr. Lester has spent his entire e legal career in Toronto, where he articled and worked at a large National firm in the early 1990 s s before moving to an Insurance boutique firm where he practiced for over 11 years. He spent a further three years as a Partner at another National firm before moving to Laishley Reed LLP in 2007. Areas of Practice Mr. Lester practices in the areas of Fidelity Insurance Law, Commercial mercial Fraud, Banking and Bills of Exchange, Insurance, subrogated and other recovery actions and E&O defence claims. Professional Experience Extensive background in Fidelity Bond claims (both Crime policies s and Financial Institution Bonds) providing coverage advice and defences where necessary, strategic guidance on issues and claims, underwriting and policy-drafting advice and guidance, as well as recovery work. Extensive experience in Commercial Fraud matters relating to Subrogation claims, Recovery claims, including Mareva injunctions, Anton Pillar orders, and tracing orders. Extensive experience in matters relating to Financial Institutions concerning bills of exchange issues, breach of trust matters, Canadian Payment Association clearing rules issues, s, and errors and omissions claims. Extensive background in liability and property insurance, both in providing coverage advice to insurers, and in defending liability claims and asserting subrogated recovery actions. Professional and Community Activities Frequent contributor to industry seminars on Fidelity Insurance, commercial fraud, and banking litigation issues Member of the Canadian Bar Association Member of the Association of Certified Fraud Examiners, Toronto Chapter Member of the American Bar Association (Tort and Insurance Practice Section (Surety and Fidelity))