Recently, in Stewart v. Lloyd’s Underwriters, 2019 BCSC 1582, the British Columbia Supreme Court considered a claim for punitive damages arising from the insurer’s alleged breach of its duty of good faith. Ultimately, the court agreed that punitive damages were warranted and made an award in the amount of $100,000. While far from the $1 million punitive damages awarded in the leading case of Whiten v. Pilot Insurance Co. 2002 SCC 18, the court’s award is the largest in BC since Whiten.
Details of the Case
On May 31, 2015, the plaintiff, Christopher Stewart, was on vacation in Reno, Nevada. While sitting at a bar he suffered a brief loss of consciousness, fell to the floor and hit his neck. He was hospitalized for 12 days, had a pacemaker inserted and underwent surgery to his spine to correct a slippage of a vertebra. The health care bills from his hospitalization amounted to $293,127.60 USD.
Prior to travelling to Reno, Mr. Stewart purchased travel medical insurance from the defendant insurers. He made a claim on the policy for coverage of his health care bills. Health Insurance B.C. paid $3,574.64 USD and the insurers paid $15,500.00 USD to have Mr. Stewart flown to a hospital in BC, leaving a balance owing of $274,052.97.
In September 2015, the insurers denied coverage, taking the position that Mr. Stewart’s injuries were directly or indirectly due to alcohol intoxication. On December 18, 2018, three-and-a-half months prior to the trial, the insurers advised Mr. Stewart that they were no longer denying coverage. The insurers filed an Amended Response to Civil Claim formally admitting coverage under the policy. The insurers also settled all of Mr. Stewart’s health care bills prior to the trial for a significant discount.
The trial proceeded with Mr. Stewart claiming, among other things, punitive damages for a breach of the duty of good faith.
The insurers denied they acted in bad faith in denying the claim, arguing that the test is not whether the denial of coverage is wrong, but rather whether the assessment of coverage was made in good faith.
In considering whether the insurers breached their duty of good faith, the court reiterated the following principles: there is no obligation upon an insured to prove coverage and the insured does not bear the onus of proving an exclusion in the policy. The court also reviewed the entire history of the insurers’ coverage investigation to determine if the insurers met the duty of good faith and fair dealing. The court found the insurers’ investigation in this case to be “overwhelmingly inadequate”, stating that there was not a balanced review of the claim but rather a search for a reason to deny coverage. The insurers delayed in obtaining a toxicology report to address a potential error in the calculation of Mr. Stewart’s blood alcohol content. Further, the insurers failed to carry out a balanced and reasonable investigation, giving as much attention to Mr. Stewart’s interests as their own. It was incumbent upon the insurers to investigate the non-alcohol-related cause as it was to investigate the alcohol-related causes. The purpose of a coverage investigation is “not to look for a putative basis for denying the claim and then to stop the investigation”.
Mr. Stewart alleged that the insurers breached its duty of good faith by obtaining unconscionable discounts from health care providers on the false premise that the claim was not covered. Mr. Stewart sought indemnification of the difference between the settlement amount and the full amount of the bills. The insurers took the position that there was no misrepresentation, fraud or impropriety in settling the health care bills at a discounted rate. The court held that the duty of good faith is owed to the insured, not to the health care providers. However, the insurers’ duty of good faith to Mr. Stewart included a duty to negotiate the health care bills in a manner that did not put Mr. Stewart at moral or legal risk. The insurers settled the health care bills without input from Mr. Stewart and failed to advise the health care providers that the claim was insured. It was a breach of the insurers’ duty of good faith to Mr. Stewart to not specifically advise the health care providers that the decision on coverage had been reversed prior to settling the health care claims. However, this did not give rise to an award of damages to Mr. Stewart for the amount of the health care bills. The court ordered that if Mr. Stewart is pursued by any health care provider, the insurers must indemnify him.
In considering the award of punitive damages, the court found that while there was not malicious behaviour directed toward Mr. Stewart, the circumstances warranted an award of punitive damages. Although the investigation was overwhelmingly inadequate, it only reached the level of being high-handed, malicious, arbitrary or highly reprehensible once the insurers received a toxicology report in November 2018, which did not support intoxication as a basis upon which to deny coverage. The court found that the conduct of the insurers in settling the health care bills, without advising the health care providers that coverage was granted, appeared to have been motivated solely by the economic interests of the insurers and was reprehensible in the most egregious of the circumstances. While the insurers told Mr. Stewart this was a covered claim, they did not advise any of the health care providers. The insurers paid no heed to Mr. Stewart’s interest, which was to have the health care bills negotiated and settled transparently. A significant factor in awarding punitive damages was the “profit” the insurers gained as a result of their coverage denial and subsequent settlement of these claims. As a result of the initial denial and delay in accepting coverage, the insurers were able to obtain enormous discounts on the claims, which would not have been available had coverage been accepted in 2015. The court stated that if punitive damages were not awarded, the breach of bad faith would be unpunished and the insurers allowed to benefit from their denial of coverage and manner in which the claims were settled.
The Stewart case is a reminder that the mere acceptance of coverage and payment of claims is insufficient to fulfil an insurer’s duty of good faith. Insurers must conduct balanced investigations into coverage and avoid undue delay in accepting coverage. Most importantly, insurers must make sure to avoid profiting from a coverage denial.