Insurance companies have an obligation to conduct investigation of insurance claims in good faith. Can an insurance company be held liable for damages in excess of the policy maximum when its disallowance of a claim results from a flawed investigation?
In a recent decision of the Nova Scotia Court of Appeal, the appellate court considered an appeal by an insurance company of a jury damage award in excess of the policy limits on the basis of the jury’s finding that the denial of coverage had been made in bad faith. The insured claimant was a dairy farmer whose barn had been damaged by a hurricane. The insurance company agreed that the hurricane was an insured peril under the insurance contract but denied that the damage to the barn had been caused by the hurricane. The jury at trial determined that the damage to the barn had in fact been caused by the hurricane and awarded to the plaintiff the full policy coverage of $265,000. In addition, the jury awarded to the plaintiff the further sum of $55,000 as punitive damages on the basis that the insurer’s bad faith in investigation of the claim offended the jury’s sense of decency.
Upon the insurer’s appeal of the jury’s punitive damages award, the appellate court reviewed the trial evidence which established that, although the insurance company’s denial of the claim had been based on an expert engineering report, the insurance company had failed to provide to the engineer the safety survey report prepared by the insurance company’s own employee after the hurricane recording the barn’s condition as “poor” whereas all previous annual reports had recorded the barn’s condition as “good”. In addition, the insurance company’s adjuster had failed to follow up with two carpenters and a barn repair contractor all of whom had provided letters attesting to the integrity of the barn before the hurricane and verifying the subsequent structural damage. On the basis of this trial evidence, the appellate court concluded:
“I agree with [the insurer] that an insurer will not necessarily be in breach of its duty of good faith by incorrectly denying a claim that is eventually determined judicially to be legitimate … Also an insurance company can often rely on an expert’s opinion to adequately support its denial. That being said however, one thing that can lead to a breach of duty of good faith and an award of punitive damages is the denial of a claim which resulted from the overwhelmingly inadequate handling of a claim …
“ … [the insurance company’s] failure to instruct its adjustor to follow up with, or have [the engineer] follow up with [the carpenters, contractor and insurance company employee] as to the state of the barn prior to Hurricane Juan, each of whom had first hand knowledge of the pre Hurricane Juan state of the barn, was tantamount to ignoring relevant evidence … Each of these men had seen the barn prior to the hurricane in circumstances where its condition was of interest to them. One of them … was an employee of [the insurance company] who inspected the barn four months before the hurricane for the purpose of assessing its insurability. He would have been readily available to [the adjuster and engineer]. [The carpenters and contractor] were third party eye witnesses to the state of the barn prior to the hurricane. As perhaps indicated from the outcome of the trial where they testified, their evidence was of crucial importance to the determination of when the damage occurred … instead of interviewing these four men, [the insurance company] essentially ignored their evidence for purposes of its investigation into [the insured farmer’s] claim …
“In addition, [the adjuster and engineer] were prevented from taking into account in their investigation the post-Juan safety survey by [the insurance company’s] failure to provide a copy of it to them. The fact that [the insurance company] had this report itself did nothing as far as the investigation into the [insured farmer’s] claim was concerned, as the investigation was in the hands of [the adjuster]. The two safety surveys prepared by [the insurance company employee] … indicate the vastly different facts concerning the condition of the barn before and after Hurricane Juan. Whether knowledge of the post-Juan safety survey would have affected the result of the investigation cannot be known at this point, but the withholding of it in itself added to the picture that was before the jury of a flawed investigation.”
On this basis, with respect to the jury’s award of punitive damages, the appellate court concluded:
“Without an award of punitive damages, [the insurance company] would not have been required to pay more than its policy required it to pay and there would be nothing to deter it from acting similarly in the future; by not following up on all of the evidence relevant to a claim, withholding critical information from the adjuster engaged to investigate a claim and allowing the adjuster to present the results of his or her investigation in a partisan, biased and unobjective manner. The actions of [the insurance company] were exceptional, justifying an exceptional remedy.”
Insurance companies have a positive obligation to investigate insurance claims in good faith. The failure to do so may render them liable for damages in excess of the policy limits.