When Does a Denial of an Insurance Claim Merit Punitive Damages?
In Truong v. Jeweler’s Mutual Insurance Company, 2024 ONCA 734, the Ontario Court of Appeal addressed the when a Court can award punitive damages an insurer who improperly denies coverage.
In 2014, the appellant, Jeweler’s Mutual Insurance Company (“Jeweler’s Mutual”) issued a policy of insurance to the respondents, Mr. Truong and Ms. Nguyen (“the respondents”). The policy covered jewellery against various risks, including theft. The value of the jewellery was $502,000 at the time of obtaining the policy.
In 2015, the respondents filed proof of loss and sought payment for the jewellery because it was stolen while they were in Vietnam. Jeweler’s Mutual requested information, conducted interviews, and questioned the respondents under oath about the jewellery. Afterwards, however, Jeweler’s Mutual did not pay the respondents for their loss.
The respondents commenced an action seeking payment for their loss. Jeweler’s Mutual did not take the position that the respondents had made a misrepresentation when obtaining the policy, which was confirmed by counsel for the respondents during the examination under oath. However, the appellant took the position that the respondents had to provide proof that they had actually owned the jewellery claimed, and had failed to do so.
The trial judge found in favour of the respondents and awarded them $502,100 as compensatory damages for the loss of the jewellery. Further, the trial judge awarded $45,000 in punitive damages. The punitive damages were awarded because the respondents should not have been put to the proof of their pre-policy ownership of the jewellery, since Jeweler’s Mutual had accepted the respondents’ ownership when it issued the policy. Therefore, the trial judge held that by not paying for the loss and imposing the obligation to prove ownership on the respondents, which would have not been reasonably expected, the appellant had acted in bad faith.
The Applicable Test
The Ontario Court of Appeal referred to the leading case for punitive damages in the insurance context, Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30, [2006] 2 S.C.R. 3. In Fidler, the Supreme Court of Canada explained that a decision of whether an insurer has acted in bad faith rendering it liable for punitive damages is a contextual one, revolving around the facts of the particular case: at para. 72.
The key question is whether the denial of insurance coverage was the result of overwhelmingly inadequate handling or improper considerations. At para. 63, the Court wrote:
In Whiten, this Court set out the principles that govern the award of punitive damages and affirmed that in breach of contract cases, in addition to the requirement that the conduct constitute a marked departure from ordinary standards of decency, it must be independently actionable. Where the breach in question is a denial of insurance benefits, a breach by the insurer of the contractual duty to act in good faith will meet this requirement. The threshold issue that arises, therefore, is whether the appellant breached not only its contractual obligation to pay the long-term disability benefit, but also the independent contractual obligation to deal with the respondent’s claim in good faith. On this threshold issue, the legal standard to which Sun Life and other insurers are held is correctly described by O’Connor J.A. in 702535 Ontario Inc. v. Lloyd’s London, Non-Marine Underwriters (2000), 2000 CanLII 5684 (ON CA), 184 D.L.R. (4th) 687 (Ont. C.A.), at para. 29:
The duty of good faith also requires an insurer to deal with its insured’s claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or to gain bargaining leverage in negotiating a settlement. A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy. This duty of fairness, however, does not require that an insurer necessarily be correct in making a decision to dispute its obligation to pay a claim. Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.
The Positions of the Parties
The respondents argued that the trial judge had made no error of law with respect to the analysis of whether to award punitive damages.
Jeweler’s Mutual maintained that it had engaged in good faith when handling the claim because it merely required the respondents to provide pre-policy ownership. Additionally, Jeweler’s mutual argued that the trial judge should have considered its conduct in light of the proof of loss provisions that contemplated substantiation of the inventory of the property lost, and because it had a right to require additional information about the loss.
The parties did not argue that there was a palpable and overriding error of fact.
Disposition
The Ontario Court of Appeal held that Jewel’s Mutual should have questioned ownership at the time that the respondents sought to obtain the policy:
It is one thing to question whether an insured who owned property at the time of the Policy thereafter disposed of or encumbered it before the alleged loss occurred, affecting the existence or extent of their insurable interest at the time of the loss. It is quite another to challenge whether the insured ever owned the property at the time it obtained the Policy.
Additionally, the Court highlighted that there was “no air of reality” that the respondents had disposed of or encumbered the jewellery in the time between obtaining the policy and experiencing the theft.
The Court also rejected the argument that the appellant was exercising its right pursuant to the policy by requiring substantiation of ownership of the jewellery. The Court noted that the conduct must still be justified by a reasonable interpretation of the terms of the policy in light of the factual context of the case. Relatedly, the Court emphasized that the requirement for substation did not specify any consequence if a specific form of substation was unavailable, and the right to additional information only referred to information that Jeweler’s Mutual might “reasonably require”.
Ultimately, the Court found that it was open to the trial judge to hold that Jeweler’s Mutual had breached the duty of good faith because of how it dealt with the respondents’ claim. Since the was no legal error, or a palpable or overriding error in fact, the trial judge’s finding of bad faith was given deference. Although there were other issues in addition to the award of punitive damages, the appeal was dismissed.
Takeaway
There are at least two takeaways from this case. First, insurers must proceed with caution and keep in mind that there is an ongoing duty to act in good faith towards their insureds, which will encompass all aspects of how they handle a claim.
Second, if there is a question about ownership of an item that will be covered by a policy of insurance, it should be addressed when the party is obtaining the policy of insurance. Alternatively, unless there is some factual basis that meets the air of reality legal test, the insurer may expose itself to punitive damages if it argues that the insured(s) had disposed of or encumbered the property that was covered by the policy of insurance.