Practical Primer On The Dreaded World Of 'Bad Faith' In The Insurance Industry

Bad faith defined

"Bad faith" generally has been defined by the Supreme Court of Canada ("SCC") as "conduct involving 'malicious intent' or that 'exceeds the limits of discretion reasonably exercised.'"1 In the insurance context, there appears to be a lack of concrete definition from the courts on what constitutes "bad faith". In McDonald v Insurance Corp of British Columbia2, the Court found that "bad faith is a term of convenience and does not carry a precise legal definition. A bad faith claim must be evaluated in light of the surrounding circumstances on a case-by-case basis: a closed category of defining attributes is neither possible nor desirable."3

In Canada, insurers are required to deal with an insured's claim fairly, both with respect to the manner in which it is investigated and assessed, and in the decision of whether or not to pay it.4

Key principles of bad faith

The key principles of bad faith articulated in Canadian case law include:

What constitutes bad faith will depend on the circumstances in each case.5; Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.6; The court will not find bad faith where the decision to deny coverage was reasonably supported by evidence and based on a reasonable interpretation of the policy.7; Ignoring expert evidence can indicate insurer bad faith.8; and The uncontested portion of a claim must be paid in a timely manner, and the insurance company cannot wait for resolution of the disputed portion.9 Bad faith: practical perspectives and case law going forward

Practical perspectives on bad faith

The key practical requirements for insurers to avoid claims of bad faith include reasonableness and fairness in denying coverage.

An insurer may be liable for identifying bad faith in the following examples:

Demonstrating arbitrariness in denying a claim and a failure to investigate relevant evidence to the claim; Demanding supporting materials for a claim to which the insurer was not entitled; Settling a claim without disclosing the terms of the coverage that had been misrepresented by the insurer when the policy had been acquired; or Failing to pay the undisputed portion of a claim in a timely manner. There will be likely no finding of bad faith when the insurer:

Failed to inform the insured about an applicable limitations period; Denied coverage based on a reasonable interpretation of the policy and evidence; Was delayed in advising the insured as to its decision on...