Minimizing The Costs of Suspicious Claims:

1. Minimizing The Costs of Suspicious Claims: Fraud and the Threat of Punitive Damages for Bad Faith

2. Insurance Fraud: A Large and Growing Problem • Between 20% and 30% of all P&C claims have some element of fraud in them1 • This number has increased from 15% in 19932 • 46% of Canadians think its easy to submit a fraudulent claim and 5% think its acceptable to pad a claim3

3. Insurance Fraud: A Large and Growing Problem

4. The High Cost of Fraud vs. the High Cost of Punitive Damages • Since 2002 and the Supreme Court Case of Whiten v. Pilot Insurance Co.4where a $1 million dollar jury award for punitive damages was upheld in a suspected arson case the industry has rightfully been cautious • On the other hand, if any element of a claim is proved to be fraudulent, the claimant is entitled to nothing, even if part of the claim is valid5 • Claims professionals walk a tightrope when navigating suspicious claims

5. What Can be Done About Fraud? • To effectively pursue fraud claims while avoiding punitive damages for bad faith, there are three keys points to remember: 1. Ensure You Respond to a Claim Objectively 2. Manage Your Documents Carefully 3. Gather Evidence to Prove the Fraud

6. Internal A company wide claims handling protocol can prevent missteps and avoid allegations that the adjuster is “out to get” the claimant. Get a non-waiver agreement or send a reservation of rights letter.6 Frequent peer, supervisor, or claims committee review of a file can help maintain objectivity. External Hire external professionals (adjusters, investigators, lawyers) who can provide honest and unbiased reports. Ensure your independent hires are reputable and would make good witnesses if they went to trial. Consider retaining an independent claims professional to take your file to mediation or pre-trial in order to maintain objectivity. Objective Claims Handling

7. Document Management Be especially careful with your documents in a suspected fraud claim. • Care should be taken in what is said in notes internally • Care should also be taken with what your investigators and adjusters say. Privilege can protect some documents, but it can also be revoked.

8. Litigation Privilege Once litigation is reasonably contemplated, documents whose dominant purpose is preparation for litigation will be protected. This privilege only lasts until the trial or settlement. Solicitor-Client Privilege Every communication between a lawyer and a client which is for the purpose of giving a legal opinion will be protected indefinitely. Document Management:When are your documents protected by privilege?

9. Document Management: Caselaw Update • In a shocking recent decision called Kavanagh v. Peel7, an insurer was ordered on a motion to produce a legal opinion given by the insurer’s lawyer in a bad faith claim. • On appeal the decision was overturned, and the Judge quoted a 2002 Divisional Court ruling which said: 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.8

10. Document Management • Caution is key because there are exceptions to the normal rules respecting privilege. • If a plaintiff can show evidence that the insurer engaged in prima facie actionable misconduct, all documents may lose their privilege. Don’t give a plaintiff a reason to get your documents. • Notes and investigation reports made for the purpose of adjusting a claim, will not necessarily be privileged.

11. Proving Fraud • Fraud is an IntentionalMisrepresentation of the Insured. There are three parts to this definition that must be considered: 1. The intentional act • How can you show that this wasn’t just a mistake? 2. The credibility of the parties • Is your insured believable? What have they misrepresented? 3. The identity of the party committing fraud • Is the fraudster the insured?

12. Proving Intention

13. Proving Intention • Courts will ensure that “honest mistakes” and some exaggerations are not held against an insured through use of statutory ‘relief from forfeiture’ provisions and through statements of law like the following: • “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.”9 • On the other hand, outright lies on a proof of loss will not be tolerated by the court. • Adjusters must ensure that there is a way to determine what is intentional dishonesty and what is an honest mistake by ensuring that Proof of Loss forms are filled and signed by the insured

14. Credibility: Proving Misrepresentation • From the moment a suspicious claim is identified, test the credibility of the insured. • Interview witnesses, and retain experts to do forensic testing. Get a detailed statement from the insured and get production of documents from the insured. • The internet can be an excellent source of credibility testing information. • The law in this area continues to develop, but private Facebook information can be ordered to be produced during the discovery phase of an action. • If you suspect that relevant information may be deleted, quickly consult a lawyer. • The successful defence of an action can turn on the court’s assessment of credibility. • The recent coverage case of Sagl v. Cosburn et al.10 was sent for a new trial by the Court of Appeal because the trial judge failed to adequately assess the credibility of the insured.

15. Credibility: Proving Misrepresentation

16. Proving Identity: It was the insured. • In a number of cases fraud is not proved because a party other than the insured committed the fraudulent act • In a case involving proven arson, where there was no evidence pointing directly to the insured, the insurer was forced to pay.11 • In a car theft claim where a salvage purchaser replaced the exact tires that were stripped from the allegedly stolen car, the insurer was forced to pay because it may have been the salvage purchaser, not the insured that was involved in wrongdoing.12 • Ensure the insured completes, signs and supports their Proof of Loss form. • Failing to take this basic step, removes a useful tool down the line. And can destroy an opportunity to prove fraud.

17. Conclusion An adjuster can reduce the risk of bad faith claims while preventing fraud losses by remembering to: 1. Responding objectively to the claim 2. Managing documents carefully, and • Gathering evidence that the insured intentionally misrepresented an important fact.

18. Sources • Canadian Underwriter, December 2006 article • Insurance Bureau of Canada, (1993). Initial Estimates of Property and Casualty Insurance Fraud in Canada: Evidence from a review of Closed Claims Files • Canadian Coalition Against Insurance Fraud website, “Canadians and Personal Injury Fraud: A Survey of Canadians” 2000. • 2002 S.C.C. 18 • Alavie v. Chubb Insurance Co of Canada. [2005] O.J. No 776 and Nelson Marketing International Inc. v. Royal & Sun Alliance Insurance Co of Canada, 2006 BCCA 327. • Rosenblood v. LSUC [1989] O.J. No. 240 • [2009] O.J. No 4349 • Davies v. American Home Assurance Co.[2002] O.J. No. 2696 • Referred to in both Pereira v. Hamilton Township Farmers' Mutual Fire Insurance Co. [2006] O.J. No. 1508 (C.A.) and National Development Corporation Limited v. The Halifax Insurance (1985), 67 N.S.R. (2d) 142 • 2009 ONCA 388 11. Goldshlager v. Royal [1997] O.J. No 2525 (H.C.J) 12. Hariri v. Allstate Insurance Co. [1998] I.L.R. 1-3500.