Written by Jesse Stanich

 

In Truong et al v Jeweler’s Mutual Insurance Company, 2023 ONSC 4006, the Court held the insurer’s unreasonable interpretation of a policy warranted punitive damages. However, punitive damages are not awarded only for incorrectly denying coverage. A punitive damages award depends on the overall conduct of the insurer when denying coverage.

 

Background

In this case, the Plaintiffs/Insureds were seeking reimbursement for the value of six pieces of jewelry which were allegedly stolen on March 7, 2015 while travelling in Vietnam. The pieces were insured by a policy which provided jewelry coverage with the six pieces listed as scheduled items. Following the alleged theft, a proof of loss was submitted and the Plaintiffs submitted to an examination under oath. No formal denial was issued following the investigation, but as payment had not been made a lawsuit commenced.

The Plaintiffs filled out the appropriate application paperwork and received confirmation that they had coverage with the Defendant/Insurer for all items prior to the loss. Evidence as to the appraisals for the jewelry were submitted at the time of policy application.

Arguments at Trial

The Plaintiffs argued there was no requirement in their policy to establish ownership after the loss. They argued this was acknowledged by the Defendant when it admitted there was no evidence of material misrepresentations in the application for coverage. They contended the Defendant’s erroneous interpretation of the policy constituted bad faith, warranting a punitive damages award.

The evidence demonstrated the Defendant acknowledged the policy as valid and in force at all times. No premiums were returned, and they did not assert the Plaintiffs misrepresented their evidence at trial.

At trial, the Defendant argued the Plaintiffs were not entitled to coverage since the evidence supporting the ownership of the jewelry, the theft of that jewelry, and the proof of the value of the jewelry were all inconclusive.

The Defendant contended the Plaintiffs must establish ownership and an insurable interest by the language of the policy. The Defendant also said the Plaintiffs were reckless in handling the jewelry.

The Defendant further alleged the jewelry was contraband and thus excluded from coverage expressly under the contract. The Defendant alleged the Plaintiffs smuggled Canadian currency from Vietnam into Canada which was in turn used to purchase the jewelry making it contraband. This argument was quickly rejected by the Court.

 

Court Analysis

The Court noted that where discretion is granted to a party in a contract of insurance, this discretion cannot be used to create new obligations in the policy as this would breach the insurer’s duty of good faith. It was also contrary to the duty of good faith of an insurer to agree to insure a risk when it knows or should have known it does not have information relevant to the risk and did not inquire about, then to raise that lack of information as a reason to deny a policy claim.

The Court further found the Defendant acknowledged the Plaintiffs had an insurable interest in the jewelry at the time the policy was issued. The Plaintiffs were never required to produce supporting documents before coverage was granted apart from appraisals of the jewelry.

The Defendant submitted clause 3(e) on the Proof of Loss required “copies of all bills, receipts, and related documents that substantiate the inventory must be attached.” The Court said the word “substantiate” did not suggest ownership must be proven in the event of a loss. The Court also noted no receipts were ever requested before the policy was issued. Thus, the Defendant’s interpretation of the policy would not promote a reasonable commercial result given the contract was entered on the basis the Plaintiffs owned and had an insurable interest in the jewelry.

The Court concluded no reasonable consumer reading the contract of insurance would conclude they must again prove they owned the jewelry to be entitled to coverage. The Defendant was seen as attempting to impose terms and conditions not provided on a reasonable reading of the contract. The Court deemed the Defendant acted in bad faith. The Court then determined there had been a breach of contract and the Defendant could no longer exercise the options provided for in the contract for evaluating the loss. Thus, the Plaintiffs were entitled to the value of the jewelry as insured at the appraised values.

The Defendant’s interpretation was unreasonable and high-handed. This erroneous interpretation of the policy warranted an award of punitive damages. The Plaintiffs were awarded $502,100 for the value of the jewelry, and $45,000 in punitive damages, with pre-judgment interest to be determined.

Takeaways for Insurers

1) Insurers are entitled to deny coverage and will not face punitive damages if their interpretation of a policy is ultimately incorrect at trial.

2) However, insurers should be careful when advancing arguments which may impose unilateral changes to policy provisions, as this could be seen as a breach of an insurer’s duty to act in good faith.