Absence Of Malice

Insurance fraud is an expensive and growing problem in our industry. Statistics show that in 2005, out of the Cdn$20 billion paid out in property and casualty claims, between 20% and 30% contained some element of fraud. That’s $4 billion to $6 billion dollars. The incidence of fraudulent claims measured in 2005 is almost double the 15% figure of claims containing some element of fraud reported more than a decade ago by the Insurance Bureau of Canada.

Unfortunately, many Canadians don’t see insurance fraud as a serious problem. A poll conducted by the Canadian Coalition Against Insurance Fraud revealed that 46% of Canadians believed it was easy to submit fraudulent claims; 5% said “padding” a claim was acceptable.

Incredibly, appellate courts in both Nova Scotia and Ontario have recently confirmed that there is nothing wrong with an insured overstating the value of a claim by approving the following statement of law: “I doubt that there are many Proofs of Loss filed in insurance claims that are exactly accurate. Some leeway must be made in allowing for puffery or establishing a negotiating position. When it is determined that the claimant is indeed indulging only in puffery or in attempting to establish a negotiating position, fraud should not be imputed to the claimant.

PROVING FRAUD

The Supreme Court of Canada established the following test for proof of fraud in a 1924 civil case: “Fraud is proved when it is shown that a false representation has been made 1) knowingly, 2) without belief in its truth or 3) recklessly, carelessly whether it be true or false.”

Canadian courts continue to cite this test as the accepted standard for proof of fraud, although it can be difficult to prove. There are virtually no reported decisions in which fraud has been proven on the basis of recklessness or carelessness. Practically speaking, fraud must be proven to have been committed intentionally.

Most provinces have legislation permitting courts to provide an insured with relief from forfeiture in situations where the claim details may not be entirely accurate. This is often used as a convenient technique to circumvent a legitimate denial of a fraud claim that cannot be strictly proven.

THE RISKS

The “swing” value of a fraud case is large. Appeal courts in both British Columbia and Ontario have recently held that nothing is to be awarded to a plaintiff if “any” aspect of the claim is proven fraudulent, even if part of the claim is legitimate. On the other hand, unproven allegations of fraud can lead to significant punitive damages awards for bad faith claims handling. In the 2002 Whiten v. Pilot Insurance Co. decision, the Supreme Court of Canada upheld the jury’s $1- million punitive damages award against Pilot in a situation in which it failed to prove the insured had committed arson. However, the high-risk nature of fraud claims should not dissuade an adjuster from investigating, assessing and even denying a suspicious claim. Proper company policies and claims-handling practices can reduce the exposure to a bad faith/punitive damages result.

OBJECTIVE INVESTIGATION

Experienced claims handlers and crime investigators agree their first hint of a fraudulent claim generally involves a gut feeling or instinct that something is not right. The importance of that early, subjective feeling cannot be overemphasized. However, it is more important to have an objective, claims-handling framework within which the examiner can gather the evidence to prove the fraud.

A company-wide, claims-handling protocol with pre-determined procedures and guidelines can prevent missteps and avoid a subsequent allegation of the adjuster being “out to get” the insured claimant.

Obtaining a non-waiver agreement or a reservation of rights letter is often a prudent step. Indeed, it may be a legal requirement when the claim is expected to be denied. In Rosenblood v LSUC, the court said in a case of questionable coverage, the insurer should advise the insured “at once” that it is investigating and obtain a non-waiver or deliver an adequate reservation of rights letter. Otherwise, it may be estopped from denying the claim at a later date.

The retention of independent adjusters, investigators, police personnel and lawyers will often be necessary. The claims handler must be willing and able to assess objectively each piece of new information generated by hired experts. The outside experts must be capable of providing honest and unbiased reports; they must also be strong enough to tell the claims handler that, in their opinion, the fraud cannot be proven. The claims handler has to be willing to listen to and accept that advice even when he/she is passionately committed to the “fraud” position.

Frequent peer, supervisor, claims committee and senior management review of your file at different stages of the claim process is strongly recommended. The retention of an independent claims professional to do a file review or to attend at mediation or pre-trial conference can also be an effective strategy.

IDENTITY OF THE PERPETRATOR

The insurer must prove the insured committed the fraud. For example, in a car theft claim in which the police recovered an insured’s Porsche in an entirely stripped condition, the insurer suspected fraud when a salvage purchaser put the exact same tires on the Porsche that were claimed to have been stolen. The court concluded that there was fraud involved. Nevertheless, the insurer still had to pay the insured’s claim because there was insufficient proof that the insured himself was involved in the fraud.

CREDIBILITY OF THE INSURED

The claims-handling strategy in a suspected fraud case has to focus on the insured. A successful defence will depend on whether the insured’s credibility can be destroyed. In Ontario, trial judges have been directed by the Court of Appeal to make specific findings of credibility for the insured claimant and to provide reasons for either accepting or rejecting the claim on that basis. In the recent case of Sagl v Cosburn et al., the Ontario Court of Appeal directed a new trial solely because the trial judge failed to consider the issue of the insured’s credibility adequately.

So start early and focus on the insured. Interview witnesses. Retain experts to do forensic testing. Take a detailed statement from the insured and get production of documents from the insured. Do Internet searches.

Social networking sites such as Facebook and Twitter provide valuable information enabling you to assess a claimant’s credibility. The law in this area is still developing, but as of the time of this writing, the court can order to be produced during the discovery phase disclosure of information on a private Facebook site. The earlier this information can be accessed, the better. Plaintiff’s counsel are well aware how damaging this information can be to their client’s case. If deletion of information is expected, then a timely legal consultation is recommended.

DOCUMENT PRODUCTION AND MANAGEMENT

Poor claims-handling practices can quickly turn fraud claims into bad faith claims. Courts expect insurers to inves tigate and assess claims in a balanced, objective and reasonable manner; they expect insurers to make decisions based on evidence, not suspicion or innuendo. Be aware that your entire file may be subject to production at some point during the litigation. Be careful about what you write in your notes. You can think bad thoughts, just don’t record them in your file. Make sure hired independents understand that their files, including notes and e-mails, may be subject to production and scrutiny as well. Hire reputable independents, individuals who will make good witnesses at trial.

In Ontario, every “relevant” document must be produced to a claimant once litigation is commenced. Exceptions fall within two main categories. Litigation privilege applies to documents created when litigation was a reasonable prospect at the time, and if the “dominant” purpose of the production or obtaining the document was to assist in the litigation. Solicitor-client privilege applies to documents sent between a client and a lawyer for the purposes of obtaining or providing legal advice.

There are constant challenges to claims for documentary privilege. The obvious hope is that your opponent will uncover the “smoking gun.” This was most recently demonstrated in the 2009 case of Kavanagh v. Peel. In this bad faith claim, the insurer’s lawyer provided at least one legal opinion on the merits of the insurer’s position in the lawsuit. Despite the insurer’s claim the document was solictor-client privileged, the insurer was ordered to produce the opinion to the insured. A lower court said the trial judge should be entitled to determine whether the insurer was acting in good faith in light of a possible legal opinion stating that there were no good grounds to continue the denial of the claim.

The lower court decision was overturned on appeal. Specifically, the appeal judge held: “There is no ‘bad faith insurance claim’ exception to either litigation privilege or solicitor-client privilege that creates a special rule for bad faith claims against insurers and consigns the normal rules respecting privilege to other claims. The same rules apply in all cases.”

Of course, those “same rules” have some exceptions. Notably, if a plaintiff can show the insurer had engaged, on the face of it, in actionable misconduct, the court may still order the disclosure of privileged documents. Don’t allow a claimant’s counsel to access your privileged documents by referring to them in non-privileged documents.

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Poor claims handling can quickly turn fraud claims into bad faith claims. Courts expect insurers to investigate and assess claims in a balanced, objective and reasonable way.

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There is no ‘bad faith insurance claim’ exception to either litigation privilege or solicitor-client privilege. The same privilege rules apply in all cases.