FIRST PARTY BAD FAITH CLAIMS AGAINST THE INSURER

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					                 PUNITIVE/AGGRAVATED DAMAGE
                   AWARDS AGAINST INSURERS

                   GREGORY A. THOMPSON AND KEVIN L. SMITH
                       McKercher, McKercher & Whitmore
                               Saskatoon, Saskatchewan



I.    INTRODUCTION:


The focus of this paper will be on cases where insureds have successfully sued their
insurer for damages in excess of the amounts owing under the policy. A review will be
made of those amounts awarded in excess of the policy amounts, and what conduct on
the part of the insurance company prompted such an award. In conducting this review,
the cases will be distinguished on the basis of whether or not they involve what is called
a Third Party claim or what is called a First Party claim (Gary Will, Punitive Damages
for Bad Faith, Canadian Journal of Insurance Law, March 1997, Volume 15, No. 2).


A.    Definition of Punitive, Exemplary and Aggravated Damages:


Awards of damages in excess of the policy limits may be characterized as either
punitive damages or aggravated damages. The term exemplary damages may be used
as well, but this is an interchangeable term for punitive damages. What then is the
difference between aggravated damages and punitive damages?


Although both types of damages arise due to improper conduct on the part of a
defendant in a civil action, aggravated damages are intended to compensate the
plaintiff while punitive damages are intended to punish the defendant. Where the
actions of a defendant are sufficiently deserving of reproach, courts may award


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aggravated damages to the plaintiff where there is evidence that this conduct caused
the plaintiff mental distress, humiliation, etcetera. Punitive damages are not based on
the impact of the impugned conduct on the plaintiff. Instead they are levied against the
defendant as both a punishment for its improper behaviour and to act as a deterrent in
preventing similar actions in the future.


The Supreme Court of Canada defines this distinction in Vorvis v. I.C.B.C., [1989] 4
W.W.R. 218 at p. 230:


              "Before dealing with the question of punitive damages, it will be well to
              make clear the distinction between punitive and aggravated damages, for
              in the argument before us and in some of the materials filed there
              appeared to be some confusion as to the distinction. Punitive damages,
              as the name would indicate, are designed to punish. In this, they
              constitute an exception to the general common law rule that damages are
              designed to compensate the injured, not punish the wrongdoer.
              Aggravated damages will frequently cover conduct which could also be
              the subject of punitive damages, but the role of aggravated damages
              remains compensatory. The distinction is clearly set out in Waddams,
              The Law of Damages (1983), at pp. 562-63, para. 979, in these words:

                      An exception exists to the general rule that damages are
                      compensatory. This is the case of an award made for the
                      purpose, not of compensating the plaintiff, but of punishing the
                      defendant. Such awards have been called exemplary, vindictive,
                      penal, punitive, aggravated and retributory, but the expressions
                      in common modern use to describe damages going beyond
                      compensatory are exemplary and punitive damages.
                      "Exemplary" was preferred by the House of Lords in Cassell &
                      Co. Ltd. v. Broome, but "punitive" has also been used in many
                      Canadian courts including the Supreme Court of Canada in H.L.
                      Weiss Forwarding Ltd. v. Omnus. The expression "aggravated
                      damages", though it has sometimes been used interchangeably
                      with punitive or exemplary damages, has more frequently in
                      recent times been contrasted with exemplary damages. In this
                      contrasting sense, aggravated damages describes an award that
                      aims at compensation, but takes full account of the intangible
                      injuries, such as distress and humiliation, that may have been
                      caused by the defendant's insulting behaviour. The expressions



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                    vindictive, penal and retributory have dropped out of common
                    use."

             Aggravated damages are awarded to compensate for aggravated damage.
             As explained by Waddams, they take account of intangible injuries and
             by definition will generally augment damages assessed under the general
             rules relating to the assessment of damages. Aggravated damages are
             compensatory in nature and may only be awarded for that purpose.
             Punitive damages, on the other hand, are punitive in nature and may
             only be employed in circumstances where the conduct giving the cause
             for complaint is of such nature that it merits punishment."


II.   "THIRD PARTY" LIABILITY SITUATIONS:


Third Party situations arise where an insured is facing the potential of a judgment in
excess of the limits of coverage under his policy. In the subsequent actions brought by
the insureds against their insurers, the courts held that the insurers had breached duties
of good faith owed to their insureds.         The measure of damages awarded in each
decision was the amount of the excess judgment against the insured.


•     In Dillon v. Guardian Insurance Co. (1983), 2 C.C.L.I. 227 (Ont. H.C.) a child
      suffered brain damage as a result of an automobile accident. Dillon was insured
      through Guardian to a limit of $50,000. The lawyers retained by Guardian to
      provide the defence assessed the probable damages at trial to be $43,000. Prior to
      trial, Guardian declined the opportunity to settle the action for between $45,000
      to $46,000. As a result, the trial of the action proceeded and a judgment of
      $77,959.95 was entered against the insured, leaving him personally responsible
      for the portion in excess of the limits of his policy.


      The insured sued Guardian for the portion of the judgment which exceeded his
      insurance coverage, arguing that Guardian had the opportunity to settle the
      claim within limits and had ignored its obligations to him by failing to do so.


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    The court agreed with the insured and ordered Guardian to pay the excess
    judgment. It found that Guardian acted unreasonably in failing to settle within
    limits for $45,000 to $46,000, which was only $2,000 to $3,000 over their own
    damages assessment.     The court also ordered that Guardian pay costs on a
    solicitor and client basis, stating that the insured would not have had to bring the
    action had Guardian acted reasonably in the first action.


•   In Shea v. Manitoba Public Insurance Corporation (1991), 1 C.C.L.I. (2d) 61
    (B.C.S.C.) a similar situation arose from a car accident in which an infant suffered
    serious brain damage. The nature of the injury made it apparent early on that
    any judgment at a trial would exceed the policy limits.


    The insurance policy involved had limits for third party liability of $300,000. The
    policy also provided for payment of certain no fault benefits to injured persons
    and for payment of court ordered interest. The lawyer appointed by M.P.I.C. to
    defend the action took the position that the $300,000 limit was an all-inclusive
    limit, meaning that any no fault benefits and court ordered interest would be
    paid out of the $300,000, not in addition to it. This position was based on the
    defence lawyers interpretation of the insurance policy and case law. By taking
    this position, the defence lawyer placed himself in conflict with the interests of
    the insured. As any judgment the plaintiff obtained against the insured would
    certainly exceed the $300,000 limit, it was in the insured's interest to have the no
    fault benefits and interest payable in addition to the $300,000, thus reducing the
    uninsured portion of such a judgment.


    During the first action, the plaintiff's lawyer offered to settle for the $300,000
    limits, but on the condition that a trial be held on the issue of whether the no



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       fault benefits and court ordered interest were payable over and above this
       amount. The lawyer for M.P.I.C. refused to agree to this proposal, insisting that
       the settlement be for $300,000 in total. As a result of this position, the settlement
       negotiations failed and a trial was held.      At the conclusion of the trial, the
       plaintiff was awarded a judgment for over $900,000. In a companion action,
       M.P.I.C. was found responsible to pay the no fault benefits and court ordered
       interest over and above the $300,000 liability limit.


       In consideration for releasing him from liability to pay the excess judgment, the
       insured assigned the Third Party plaintiff his right of action against M.P.I.C. for
       failing act in good faith during the defence of the first action. The court hearing
       the second action found against M.P.I.C. on two grounds. Firstly, that M.P.I.C.'s
       position regarding no fault benefits placed it in a conflict of interest with the
       insured.   Secondly, for failing accept the Third Party's offer to settle non-
       statutory liability damages for the limits available while allowing the no fault
       benefits and interest issues to be dealt with through litigation. In the court’s
       opinion these actions evidenced the fact that only the interests of M.P.I.C. were
       considered at the first trial, to the complete exclusion of those of the insured.


III.   "FIRST PARTY" LIABILITY SITUATIONS:


The next group of cases involve insureds taking action against their insurer for coverage
under a policy of insurance. In addition to being awarded the amounts they are entitled
to under the policy, the insureds are also awarded either punitive or aggravated
damages as a result of the improper conduct of the insurer in wrongfully denying the
claim in the first instance. The word wrongfully is used because punitive or aggravated




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damages are not awarded where the court concludes that there was a real issue as to
whether or not the insured was entitled to recover under the policy.


A.     Punitive Awards:


The first three cases to be discussed under this heading involve denials of coverage
where an insured building was destroyed by fire. The remaining two cases involve
cancellations of benefits under policies of disability insurance.


1.     Fire Loss Cases:


All insurance companies and counsel are aware of the decisions in Whiten v. Pilot
Insurance Co. (1999), 170 D.L.R. (4th) 280 (Ont. C.A.). It is noteworthy because at the
trial level, punitive damages were assessed at $1,000,000, which was the highest
punitive damages award against an insurance company in Canadian history. This
award was reduced on appeal to $100,000. An appeal (and cross-appeal) have been
made to the Supreme Court of Canada, although at the time of writing this paper no
date has been set for the hearing. Given the significance of this case and the consequent
chill wind it blew across the insurance industry recently, a summary of the facts is set
out below.


Whiten involved a fire which entirely destroyed the home of the insureds, along with
all of their personal belongings.      Although the actual cause of the fire was not
determined, everyone who investigated the fire in the six months afterwards concluded
it was accidental. Initially the insurer hired an experienced adjuster who concluded the
fire was accidental and recommended that the claim be paid. The insurer decided to
ignore the adjuster's recommendations and denied the claim. It then ceased paying the



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rent for the insured's temporary residence, even though it knew the insureds did not
have the resources to pay that themselves.


The insurer's next step was to ask the adjuster to investigate further into the fire. When
he once again concluded the fire to be accidental, the adjuster was removed from the
file. A request was then made to the Insurance Crime Prevention Bureau to investigate.
I.C.P.B. concluded that there was no evidence which would support a denial of
coverage. The insurer gave this conclusion no credence and refused to consider it in
further dealings with the insureds.


An engineering expert was hired next to investigate the loss. He too found that the fire
was accidental. In two follow-up reports he gave the same opinion, but after a meeting
with the insurer's lawyer he re-classified the fire as suspicious and possibly incendiary.
The insurer then hired a forensic engineer, a fire investigator and a fireman. These new
experts were instructed by the insurer's lawyer and were not given the reports of the
original adjuster, but were provided with information which was misleading, if not
inaccurate. The firefighter concluded the fire was accidental while the forensic engineer
and fire inspector gave opinions which supported an arson defence. However the
insurer conceded at trial that these conclusions were likely influenced by defence
counsel.


The action on the part of the Whiten’s to enforce the policy was tried by a judge and
jury.   The jury awarded the insureds judgment on the insurance policy and an
additional $1,000,000 as punitive damages against Pilot Insurance Co. The trial judge
remarked that this amount was without precedent, but that it was reasonable given the
conduct of the insurer.    On appeal to the Ontario Court of Appeal, the punitive
damages were reduced by the majority to $100,000 on the basis that $1,000,000 was too



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large a jump from previous awards for such cases. The dissent would have let the
award stand.


The trial in Labelle v. Guardian Insurance Co. (1989), 38 C.C.L.I. 274 (Ont. H.C.)
involved a dispute over the quantum of an insured's loss after a fire at her home. There
was no issue of coverage here, the fire having spread from a neighbouring house. The
court concluded that the insurer had acted improperly in its handling of the insured's
claim. For example, on the repairs to the house itself, the insurer attempted to coerce
the insured into accepting an estimate on repairs which was inadequate. This estimate
was altered by deleting the breakdown of the work to be done, thus preventing
comparisons to the other estimates. Even after the insurer was made aware that the
estimate was inadequate, it persisted in attempting to have the insured accept it.


Regarding the contents claim, absolutely no assistance was provided to the insured on
how to prepare the claim and what information was to be included. When the proof of
loss was submitted, payment was refused.          As well, the insured failed to make
payments for items it had promised to reimburse, such as for the clean-up costs in the
undamaged areas of the house.


As a result of the insurers conduct towards the insured, it was found to have acted in
bad faith and punitive damages of $10,000 were assessed. The court also ordered that
the insured would receive her costs on a solicitor and client basis.


The final fire damage case is Yaskinski v. Wawanesa Mutual Insurance Company,
1999 SKQB 158, where the insured's hotel was destroyed by fire. Initially arson was
suspected, however there was insufficient evidence on which to base a denial of
coverage. The first proof of loss filed by the insured was rejected by Wawanesa without



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any reasons given. Requests made for disclosure of the reasons for the rejection by the
insured's lawyer were ignored.       The court found that, given the insured's lack of
knowledge in the area of insurance, this rejection was made in bad faith.


The insurer also considered the insurer to have acted improperly by choosing to rely on
a valuation of the insured property which had been prepared on an income basis. The
valuation was done without consultation with the insured, and as a result was not
accurate. The approach taken by the appraiser retained by the insured was that of
replacement cost less depreciation. This approach was considered more appropriate by
the court. The court found that the above incidents were evidence of an "aloofness of
conduct" by the insurer in its dealings with the insured. An award of punitive damages
was made in the amount of $4,000.


2.    Disability Insurance Claims:


In Ferguson v. National Life Assurance Co. of Canada (1996), 36 C.C.L.I. (2d) 95 (Ont.
Gen. Div.), after 4 ½ years of payment, the insurer cut off the disability benefits of an
insured suffering from mental problems.       The termination of benefits followed an
examination of the insured by a psychologist, which was conducted at the insistence of
the insurer. The insurer had advised that it needed a second medical opinion, and sent
the insured to the psychologist in Montreal, even through the insured lived in Ottawa.


As instance of improper conduct on the part of the insurer cited by the court were:
having the "second medical opinion" done by a psychologist when the original opinions
were from psychiatrists; not having the report of the psychologist reviewed by the
original psychiatrists; failing to seek a new psychiatric opinion; sending the insured to
Montreal knowing that he suffered from symptoms of agoraphobia (a morbid dislike of



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public places). Also significant to the court was the fact the insured was never given an
opportunity to respond to the reasons for the termination. As a result of the improper
conduct of the insurer, the court concluded that punitive damages were in order and
awarded $7,500.


The second disability case reviewed is Adams v. Confederation Life Insurance Co.,
[1994] 6 W.W.R. 662 (Alta. Q.B.), which involved a nurse who became disabled from
work due to fibromyalgia and depression. The insured was originally granted benefits,
but they were discontinued after 14 months. After an action was commenced for re-
instatement of the benefits, a settlement was reached in which the insured was to
receive "rehabilitation benefits" under the policy for an indeterminate period of time.
The insured was to be paid these benefits on the basis that she was only able to work for
4 hours a day, 4 days a week at a bookstore owned by herself and her husband. The
insured's doctors were to provide regular reports on her status to the insurer, who also
had the right to request that independent medical exams be done.


After the agreement had been in place for two years it was terminated by the insurer on
the basis that the insured was capable of working more than 16 hours per week. This
decision resulted from surveillance which the insurer had conducted on the insured. A
second court action was commenced and at trial the court found the insured to be
disabled and re-instated benefits. It also reviewed the insurer's conduct and concluded
that punitive damages were appropriate. In awarding punitive damages the court
noted that the insurer had commenced the surveillance for no good reason, as the
medical reports had not changed and no independent medical exam had been done
which would indicate a change in the insureds condition. The court also noted that the
insurer relied solely on the surveillance, which was contrary to all other information
available, including an independent medical examination conducted after the second



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action was commenced and which supported the insured. As a result of the insurer's
conduct, punitive damages of $7,500 were awarded.


B.    Aggravated Damages:


As set out at the beginning of this paper, aggravated damages are used to provide
redress to the insured for damages suffered as a result of inappropriate behaviour by
the insurer. In Thompson v. Zurich Insurance Co. (1984), 7 D.L.R. (4th) 665 (Ont.
H.C.), after an accident in which he was rendered a quadriplegic, the claimant applied
for rehabilitation and loss of income benefits from the insurer of the driver or the
vehicle. The application was based, erroneously, on the claimant's previous part-time
job. The insurer was quickly notified of the mistake, but it responded by discontinuing
the income replacement benefits and refused to provide the rehabilitation benefits. An
action was commenced in which the court found that while the insurer might have been
justified in being skeptical about the income claim at first, sufficient information had
been provided later to prove the amount claimed. The court also noted that the insurer
chose not to investigate the claim, but merely denied payment.


Aggravated damages of $750 were awarded for the failure to pay the benefits,
particularly the rehabilitation benefits which were needed to modify the claimant's
house, in a timely manner. The financial difficulties of his family which resulted from
the refusal of coverage caused the claimant to suffer some mental distress. The low
award reflected the fact that the effects were of a short duration and the claimant
recovered quickly from them.


In Warrington v. Great West Life Assurance Co. (1995), 31 C.C.L.T. (2d) 256 (B.C.S.C.),
the insurer terminated benefits after two weeks, having concluded the insured was not



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disabled. The termination was based on limited surveillance conducted on the insured
and a review of the insured's file by the insurer's "medical board", which consisted of
one doctor who reviewed the file but did not actually examine the insured. In response
to the termination of benefits, the insured commenced an action.


In finding the insured entitled to benefits and aggravated damages, the court noted the
following. Although no firm diagnosis was made initially on the cause of the insured's
disability, all of the medical reports concluded that, regardless of the cause, the insured
was disabled.    Instead of having an independent medical examination conducted,
surveillance was commissioned.       The conclusion of the surveillance was that the
insured was not disabled, however the activities observed were satisfactorily explained
at trial. Lastly, the insurer's doctor was of the opinion that fibromyalgia, in general,
would not disable a person from the type of job (sedentary) done by the insured. The
court found that this conclusion failed to take into account the insured's particular
situation and was made without any independent examinations.


The court concluded that the denial of benefits caused the insured a great deal of mental
distress, as the disability payments were his only source of income. The added stress
also exacerbated the insured's problems with fibromyalgia. As a result, aggravated
damages of $10,000 were awarded.


Another case of aggravated damages arising from a denial of disability benefits is Evans
v. Crown Life Insurance Co. (1996), 37 C.C.L.I. (2d) 61 (B.C.S.C.). Here the insured had
received benefits for 4 ½ years due to disability when they were suddenly stopped on
the basis that the disability was due to a mental condition, and therefore not covered by
the policy. This conclusion was reached after a review of the insured's file by a doctor




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for the insurer. The insured was not examined, nor did the reviewing doctor speak to
her doctors.


At trial, the court awarded re-instatement and aggravated damages of $20,000. The
court found that the insurer had acted in a harsh and vindictive manner towards the
insured, resulting in mental distress. In addition to terminating the benefits, which
constituted the only means of financial support to the insured, the insurer also placed
surveillance on the insured after the termination of her benefits. This surveillance was
known to the insured and greatly increased her stress and anxiety. The total effect of
the insurer's conduct was described as profound and as having greatly exacerbated the
insured’s medical condition.


The final case reviewed under this heading involves aggravated damages awarded in
an action on a property insurance policy. In Goodman v. Royal Insurance Co. of
Canada, [1996] 6 W.W.R. 744 (Man. Q.B.) the insured's finished basement was seriously
damaged when water from a plugged drainage ditch over-flowed into the basement.
Although the insurer denied coverage, the court found that the loss was in fact covered.


Aggravated damages were awarded for the mental distress suffered by insureds. The
court found that Royal had acted improperly in failing to investigate the actual source
of the water and for denying coverage so hastily. As a result of this denial, the insureds
were deprived of the use of 40% of the living space in their home and were forced to
take legal action against the municipality for the damage, which the insurer would have
done if it had acted properly and afforded coverage. An award of aggravated damages
of $7,500 was made.




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C.     Other Awards (Compensation for Costs):


In addition to awards of punitive and aggravated damages, courts have also made other
types of awards where the conduct of an insurer was held to be improper, but either did
not cause aggravated damages to the insured or was not sufficiently harsh or vindictive
to attract punitive damages.


A common type of award for this kind of behaviour is in the form of solicitor and client
costs. An example of the type of conduct which attracts this type of award, but not a
further award of punitive damages, can be found in Janmohamed v. Co-operators
General Insurance Co., [1997] A.J. No. 670 (Q.B.). In Janmohamed a property owned
by the insured was damaged by a broken water pipe. At the time of the breakage the
house was vacant, contrary to the policy exclusions. However the insured had never
been provided a copy of the policy, so at trial it was found that the exclusion did not
apply. The court also decided that while the insurer did not act in bad faith by denying
coverage originally, had it done a proper investigation it would have learned a policy
was not provided. The lack of a proper investigation in this case did not warrant an
award of punitive damages, but costs were awarded against the insurer on a solicitor
and client basis.


Yet another type of award was made in Jauvin v. L'Ami Michel Automobile Canada
Ltee. (1986), 33 D.L.R. (4th) 576 (Ont. H.C.), where the premises of the insured's car
dealership were destroyed by fire. The policy had a replacement cost endorsement and
immediately after the fire the insured began preparations to rebuild. At trial it was
accepted that the insurer had decided very early on that it would not pay out on the
policy without litigation, but it did not communicate this intention to the insured. In its
pleadings, the insurer relied on allegations of material non-disclosure and



                                           - 14 -
misrepresentation to deny coverage. Prior to trial the insurer abandoned all of these
allegations except wilful misrepresentation, which was abandoned during argument at
trial. The court noted that it was quite clear prior to that point that such a defence could
not succeed.


Although it was a requirement of the replacement cost endorsement that the insured
rebuild, the court ordered that full replacement cost was recoverable notwithstanding
the fact the premises had not been rebuilt. The basis for this award was that the insured
would have rebuilt had the insurer not improperly denied coverage and maintained
that denial right through to trial, even though there was no evidence which supported a
denial of coverage.


IV.    CONCLUSION & DISCUSSION:


The above cases reveal that insurance companies can and will be held liable to pay
amount in excess of policy limits in situations where a court concludes that the insurer
failed to act properly.


In Third Party situations, the insurer's additional liability will be the amount of a
judgment against an insured which exceeds the policy limits. The insurer will be
responsible for such an award where it fails to settle within the limits of coverage when
such a settlement is reasonable or where it has placed its own interests ahead of those of
the insured.


When, as in Dillon, it is very likely that an award at trial will be near or over policy
limits, the insurer must carefully consider any opportunity to settle within those limits.
A failure to do so which results in a judgment significantly in excess of policy limits will



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be viewed as unreasonable conduct by the insurer and may attract liability to pay that
excess.


In cases where there is a divergence of the interests of the insurer and insured, such as
in Shea, separate counsel should be retained to represent both the insurer and the
insured.   This will allow the insurer to pursue those arguments favourable to its
interests without compromising the insured's right to a full defence. It should be
pointed out that the Shea decision involved a mandatory statutory insurance scheme,
which may limit somewhat its application outside of Manitoba. However, with the
advent of modified no fault insurance schemes, such as that currently in place in
Ontario, there is the possibility of similar situations arising which could place liability
insurers in conflict with their insureds.


In the end, the question that will asked by a court hearing a Third Party type action will
be whether or not the insurer acted reasonably in refusing to settle within the limits of
the policy. Where such an opportunity has presented itself, there will be a very high
burden placed on the insurer to justify any decision not to settle which precipitates the
trial of the matter and results in an award which exceeds coverage.


In First Party situations, the imposition of additional liability will be tied to the manner
in which coverage is denied. Where an insurer chooses to ignore the majority of the
evidence available to it in order to deny coverage, it runs the risk of an award of
punitive and/or aggravated damages. The chances of a very large punitive award will
increase where the insurer attempts to manipulate the evidence to support its position
or where it uses its stronger financial position as leverage.




                                            - 16 -
If a claim is suspicious, it is very important that an insurer take care to ensure that its
decisions are supported by reliable evidence and that it does not ignore, discount or
otherwise fail to consider or obtain other relevant evidence.        By relying on weak
evidence, such as poorly conducted or limited surveillance, or medical opinions made
without direct examinations of the person, an insurer places itself in a very precarious
position. This is especially so where there is other credible evidence which supports the
insured that already existed but was ignored by the insurer, or which is submitted by
the insured to contradict the insurer's evidence.


In closing, it is important for insurers to be aware that these type of damages awards
can be made when their conduct towards a claim is found lacking. Particular attention
has to be paid to the grounds for any decisions made which could either expose an
insured to losses beyond a liability policy or which would deny coverage under a
property or disability policy. In the latter situation unless suspicions of wrongdoing on
the part of the insured can be substantiated, denying coverage will likely lead to a
punitive damages award well beyond the policy amounts.


It must be assumed by all insurers that their actions in responding to a claim will be
examined carefully by a court in the event of any disagreement between it and the
insured. By accepting that it, as an insurer, will be held to a high standard of conduct in
its claims handling, an insurer will best guard itself from exposure to these types of
awards.


March, 2000




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