Good Faith in Insurance Dealings: A Two Way Street

It is commonly known that contracts of insurance are contracts of utmost good faith, requiring the parties to deal with each other fairly and in good faith. The duty of good faith cuts both ways — both insurer and insured have an obligation to act in good faith. In Whiten v. Pilot Insurance Co. ("Whiten")[1],the Supreme Court of Canada affirmed the reciprocal nature of the duty of good faith^[2], and that breach of this duty may amount to an independent actionable wrong, compensable through punitive damages. However, while numerous cases have seen awards of punitive damage made against insurers for bad faith in insurance dealings, relatively few Canadian decisions have awarded punitive damages against an insured for claims of bad faith brought by an insurer.^[3] There is some precedent for awards of this nature, serving as a reminder that good faith in insurance dealings is a two way street.

In a short decision by Justice Low, National Life Assurance Co of Canada v Skowron^[4] ("Skowron"), the Ontario Superior Court of Justice awarded punitive damages to an insurer due to the insured's breach of the duty of good faith. The Court relied upon the Alberta Court of Queen's Bench decision, Andrusiw v Aetna Life Insurance Co of Canada ("Andrusiw"),^[5] to support its award of punitive damages. In Skowron, Justice Low noted, "There was a clear breach of the duty of good faith and I am satisfied that the circumstances warrant an award of punitive damages for both specific and general deterrence purposes."

More recently, the Ontario Superior Court of Justice awarded punitive damages to an insurer as a result of an insured's breach of the duty of good faith in the case RBC General Insurance Co v Field^[6] ("RBC"). In that case, the insurer brought an action against the insured alleging the insured made false statements and committed fraud in obtaining insurance policy payouts related to a motor vehicle accident. In addition to seeking repayment of all amounts paid under the insured's policy, the insurer also sought $100,000 for punitive damages.

When evaluating the claim for punitive damages, Justice Emery cited to the Supreme Court of Canada's decision in Bhasin v Hrynew ("Bhasin")^[7] to support a reciprocal duty of good faith between an insurer and an insured. In RBC, the insured committed an actionable wrong by making false statements and providing fabricated documents. As a result, the insurer was entitled to punitive damages in the amount of $24,000 arising from the breach of good faith:

150 I conclude as a matter of law that there is a doctrine of mutuality that imposes a duty on an insurer and an insured party to act in good faith when dealing with each other in the making or processing of a claim under a policy of insurance. This mutuality arises from the reciprocal duty of an insured to act fairly, honestly and in good faith when making a claim, and of an insurer to act fairly, honestly and in good faith when adjusting that claim.

In Ruffolo v Sun Life Assurance Co. of Canada ^[8] ("Ruffolo"), Master MacLeod left open the possibility of a reverse bad faith counterclaim, also known as a comparative bad faith claim, brought by an insurer in Ontario. Justice McLeod implied that the insurer would only be entitled to a set off against punitive damages awarded to the insured. This is in contrast to both the Skowron and RBC decisions, which appear to support a stand-alone finding of punitive damages payable to the insurer.

Ultimately, reverse bad faith claims are still relatively rare in Canada. Although the Supreme Court has reinforced the reciprocal nature of the duty of good faith, there are few cases in which punitive damages have been awarded to insurers in connection with an insured's breach of good faith. However, the authority clearly exists for such damages to be awarded. Insurers and insureds alike are well reminded that good faith in insurance dealings is a two way street.