The Duty of Good Faith in Insurance Claim Administration: The Do’s (and Particularly the Don’ts) for Claim Handlers

In this case, the Plaintiff, a numbered company, was in the process of renovating a building with the goal of opening a high-end restaurant in Surrey, BC. The Plaintiff held an insurance policy with the Defendant Insurer, which included coverage pertaining to business losses. During the renovation process, the land on which the building sat experienced significant land subsidence (in other words, sinking and instability) which caused damage to the property and delayed the renovation process. A flood occurred several months later. The Plaintiff sold the property without ever opening the restaurant. As a result of these events, the Plaintiff claimed indemnity pursuant to the policy.

The bulk of the Plaintiff’s claim against the Defendant Insurer was with respect to business losses. The Defendant Insurer, based on its own expert accounting evidence, paid the Plaintiff just over $1 million for business losses pursuant to the policy. The Plaintiff claimed the Defendant Insurer failed to reasonably assess the business loss component and acted in bad faith in handling and assessing the claim. The Court ultimately agreed that the Defendant Insurer acted in bad faith and under-compensated the Plaintiff’s business loss, awarding the Plaintiff approximately $2.2 million more than had already been paid.

A good portion of the Court’s analysis focuses on duelling expert opinions as to quantifying the business loss in the context of a restaurant business with no earnings history, highlighting some general quantification principles along the way such as:

• The requirement to establish that a loss occurred on a balance of probabilities;

• The necessity of quantifying the extent of the loss pursuant to the evidence and not in a speculative manner; and

• The fact that even in the case of a business having no earnings history, the assessment of the probability of hypothetical events occurring must be completed.

The Court’s View on Good (and Bad) Faith

The Court found the Defendant Insurer engaged in unreasonable and inappropriate conduct which amounted to bad faith. Specifically, the Court held that the following was improper conduct for an insurance company in handling a claim:

• Unreasonable Cancellation of the Policy: While handling the claim, the Defendant Insurer cancelled and reinstated the policy at least three times. While the Court held that these cancellations did not amount to a breach of the duty of good faith given, in part, that the third cancellation decision was reconsidered and reversed, the Court did expressly state that the third cancellation occurred without cause and sat at odds with the peace of mind that insurers sell, rendering the Plaintiff helpless in the situation. The third cancellation was found to have been due to, at least in part, an internal lack of communication within the Defendant Insurer resulting in inconsistency in its position on coverage. The Court commented that better communication between individual departments within the insurer was necessary so as to prevent such inconsistencies.

• Failure to Disclose: With respect to the physical damage component of the claim, the Defendant Insurer offered, and the Plaintiff ultimately accepted, a cash settlement. However, in presenting that offer, the Defendant Insurer failed to advise the Plaintiff of an internal policy that upon acceptance of the cash settlement, the policy would be cancelled. Once accepted, the Defendant Insurer cancelled the policy for a final time. The Court held there was a positive duty to advise the Plaintiff of this internal policy when making the cash offer, and in failing to do so the Defendant Insurer breached the contractual duty of good faith. The Court echoed comments from prior case law that an insurer is “bound to give as much consideration to the interests of the insured as it does its own interests and is not to do anything to injure the insured’s right to benefits under the policy.”

• Failure to Assess All Information: The Court found that the Defendant Insurer failed to reasonably assess all relevant information in quantifying the Plaintiff’s business loss claim. They wholly relied on an accountant (with no experience in the restaurant industry) to assess the loss and accepted the quantification despite knowing various flaws in the analysis. Further, the Defendant Insurer failed to reasonably assess information and evidence submitted by the Plaintiff as to the extent of the loss. In so doing, the Court found that the Defendant Insurer acted in bad faith by unilaterally relying on its own expert evidence and refusing to meaningfully consider evidence submitted by the Plaintiff. The Court went on to say that an insurer cannot disregard compelling evidence submitted by an insured.

The Court issued a declaration that the Defendant Insurer acted in bad faith in handling the Plaintiff’s claim. However, despite that misconduct, the Court did not award punitive damages, which do not automatically flow from a finding of bad faith. The Court stated that the Plaintiff did not plead, argue, or provide sufficient evidence to establish the required nexus between the breach of the duty of good faith and an award of punitive damages. Notably, the Court did say that the Defendant Insurer’s handling of the claim echoed conduct which has warranted punitive damages in other cases, signalling that the totality of circumstances in this case was very close to meeting the threshold for an award of punitive damages.

Key Takeaways

Insurers owe a duty of fairness and reasonableness in assessing claims submitted by their insureds. They are expected to act with due regard to the interests of their insureds as opposed to acting in a wholly self-interested manner. While that duty is generally understood, case law continues to provide relevant examples of what types of conduct infringe on the principles of good faith contractual performance in the insurance context. The consequences of a breach of the duty of good faith can be significant, although punitive damages do not necessarily result. Insurers should act with caution to avoid the risk of penalties associated with their claims handling processes.

Field Law can assist with complex claims handling matters. Contact Brandon Harrison in Calgary, Christine Pratt, KC in Edmonton, or any member of our Insurance Group for guidance and support.

Link to decision: 1048977 B.C. Ltd. v. Aviva Insurance Company of Canada, 2025 BCSC 1532