Delay is (not always) preferable to error

With all due respect to Thomas Jefferson, sometimes a delay is not preferable to error. In the recent decision of Sidhu v. The Wawanesa Mutual Insurance Company, 2011 BCSC 1117, the British Columbia Supreme Court awarded a plaintiff punitive damages against their insurer, Wawanesa, largely as a result of what the Court found to be the dilatory manner in which the claim was handled.

The plaintiff’s family comprised of seven individuals residing in a house in Surrey. During the night on February 7, 2005, the plaintiffs awoke to a loud noise outside of their house. The husband and wife investigated for a few minutes and discovered a part of the house was engulfed in flames. The family was forced out of the house and the incident responded to by the Surrey Fire Department and neighbours. The house was insured with Wawanesa under a homeowner’s policy which contained the standard exclusion for losses due to intentional or criminal acts.

Wawanesa, relying on evidence of fire investigators and adjusters investigations, took the position of denying the claim with the allegation that the plaintiffs deliberately set fire to their house in order to receive insurance monies. However this decision was not conveyed to the plaintiffs until January 2007 in a letter responding to a Statement of Claim and a Writ of Summons filed by the plaintiff to enforce cover under their policy.

The Court noted that to establish that an insured deliberately caused a fire an insurer must prove that; the fire was incendiary in nature, and that the insured had both the opportunity and motive to set the fire.

At trial, it was conceded by the parties that this was an incendiary fire and was deliberately set by someone.

Wawanesa argued that the husband was in the bedroom at the time the fire was started and accordingly had the opportunity to start it. Wawanesa mostly relied on inconsistencies in discovery evidence and statements to investigators as evidence that the husband had the opportunity to start the fire, however the court found that he was being truthful about his evidence and based on Wawanesa’s own investigator’s description of events, the trial judge found that the husband would not have had the opportunity to set the fire and then leave the room without suffering from smoke inhalation or injuries of some kind, none of which were the case.

In regards to motive, Wawanesa argued that the insured’s family was under financial strain as a result of two other incidents, the recent maternity leave of the wife, and their pattern of borrowing increasing sums of money against their house’s mortgage. The two incidents referred to were the uninsured business loss as a result of a fire in 2002 at the husband’s auto repair shop and a fire involving two vehicles outside their house in January 2005. On the basis of the evidence before the court, the trial judge did not accept that Wawanesa had proven the motive. The fact that the insurance coverage over the house had been increasing was attributed to the insurance agent’s advice; the increase in mortgage debt was justified with lowering interest rate and the insured investing in another property and the business; further the trial judge found no evidence of financial strain on the household to sufficiently prove motive.

Accordingly the court held that the claim for benefits under the policy was allowed and then turned to the claim for punitive and aggravated damages.

The plaintiff’s alleged that Wawanesa owed them a duty to investigate and assess the claim on its merits and in a balanced and reasonable manner. The trial judge found Wawanesa strongly suspected arson very early on and did not supply proof of loss to the plaintiff’s prior to February 2007, an entire two years after the incident.

The court commented that the plaintiff’s were left in a “lurch” for almost two years without Wawanesa concluding their investigation and providing them a proof of loss or any financial assistance. The court found that the plaintiffs had a reasonable expectation that their claim would be dealt with fairly, including a timely investigation and resolution, and to be informed of Wawanesa’s decision within a reasonable time. This was held not to have been done.

In considering the award for punitive damages, the court stated that:

[175]     The issue is whether the defendant breached its contractual duty to pay insurance benefits and whether it failed to deal with the plaintiffs’ claim in good faith. The duty of good faith required the defendant to act fairly in the investigation and assessment of the claim and in the decision whether or not to pay the claim.

[176]     The insurer was entitled to take all necessary steps to assess the merits of the claim in a balanced and reasonable manner. They were not permitted to deny or delay payment in order to take advantage of the insureds’ vulnerability or to gain bargaining leverage in negotiating a settlement.  The mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.

[177]     The duty requires the insurer to deal with the claim fairly and in a timely way. In the circumstances of this case the investigation was never completed to the satisfaction of the defendant. The investigators had formed the opinion that Hardip was responsible for the fire and communicated that view to the insurer. In the circumstances, the defendant may have been justified in denying the claim and litigating the plaintiffs’ entitlement. Apparently Wawanesa did not want to rely on that recommendation or assessment as a basis for denying the claim without obtaining further statements. They delayed their response to the Sidhus until the investigation was complete; that response came two years after the fact and only in response to a writ of summons claiming benefits under the policy. This appears to be the first time the defendant (as opposed to the investigators’ suggestions in the interviews) told the plaintiffs that their claim was denied.

[178]     In the circumstances of this case I conclude that the defendant was entitled to investigate the claim thoroughly and fairly. However, the plaintiffs had a reasonable expectation that their claim would be dealt with fairly, including timely investigation and resolution of their claim, and to be informed of the defendant’s decision in a reasonable time.

[179]     On the evidence before me, the defendant did not undertake the investigation or assess the claim in a fair or reasonable fashion. I am directed to consider the insurer’s conduct throughout the whole claims process to assess whether the insurer acted “fairly and promptly in responding to the claim”: 702535 Ontario Inc. v. Non-Marine Underwriters Members of Lloyd’s London (2000), 184 D.L.R. (4th) 687 (Ont. C.A.) at para. 30.

The court commented that house insurance contracts are purchased by a homeowner for a “level of assurance and peace of mind that they will be treated promptly and fairly if their home is damaged by fire.” He found that Wawanesa was blameworthy for its dilatory manner of handling the claim for plaintiffs who were “unsophisticated and vulnerable victims of the delay.” He found that the negligence of Wawanesa in handling the claim and disregard for the plaintiff’s reasonable expectation rose to the level of blameworthiness discussed by the Supreme Court of Canada in Whitten v. Pilot Insurance.

In considering proportionality of the measure of punitive damages, the trial judge considered the measure of loss and awarded a sum of $50,000 as an amount sufficient to deter Wawanesa from repeating its conduct.

The court did not allow recovery of aggravated damages on the basis of lack of evidence on the point of damages suffered by the husband, other than minimal changes to his life as a result of the deal in processing of the claim.

[The Editor would like to thank articling student Sunjeet Deol for his assistance with this Post]