In Canada, a disability and life insurance policy contains an implied contractual duty of good faith. These terms, though seemingly simple, are complex, so let’s start with the definitions and then move to what those two terms might mean to you.
Good Faith n. honest intent to act without taking an unfair advantage over another person or to fulfill a promise to act, even when some legal technicality is not fulfilled. The term is applied to all kinds of transactions. Source: Dictionary.Law.com
On the other hand, here is the definition of bad faith:
Bad Faith n. intentional dishonest act by not fulfilling legal or contractual obligations, misleading another, entering into an agreement without the intention or means to fulfill it, or violating basic standards of honesty in dealing with others. Most states recognize what is called “implied covenant of good faith and fair dealing” which is breached by acts of bad faith, for which a lawsuit may be brought (filed) for the breach (just as one might sue for breach of contract). The question of bad faith may be raised as a defense to a suit on a contract. 2) adj. when there is bad faith then a transaction is called a “bad faith” contract or “bad faith” offer. Dictionary.law.com
With those two definitions out of the way, let’s dive into what a claimant should expect in Canada.
In simple terms, it is reasonable for a claimant to assume that an insurance company is operating in good faith. The reality is there is a huge potential liability issue for insurance companies if they cross the line and breach their duty of good faith.
I’ll use an extreme example:
Your insurer likely has a medical consultant or medical consultants to assist the insurer in determining if you are entitled to benefits. These consultants are either independent doctors who work on a contract basis with the insurance company or they might be employed by the insurer on a full-time or part-time basis.
Assume that your insurer provides the medical consultant with your file and asks that he or she review the file to assist the claims adjuster in determining if your claim should be approved or denied. The medical consultant will then write back to the claims adjuster and provide an opinion on your disability.
Here is an extreme example of bad faith:
The medical consultant says that in his or her opinion you are clearly disabled and your claim should be paid immediately. Ignoring that opinion, the insurer writes to you and says that based on their review of your file, it has been determined that you are not disabled and accordingly, your claim has been denied.
That could be an example of your insurer’s breach of its duty of good faith and may be considered by a court of law as an act of bad faith because the insurer sought the advice of their expert and then blatantly ignored that opinion.
In this case, you could be in a position to advance a claim against your insurer for punitive damages.
Does this type of situation happen? It could. Is it something that happens every day? No.
So, the denial of a life or disability claim can be a stressful situation. Many claimants consider the denial a personal affront and consider the denial an attack on their credibility and honesty.
My hope is to lessen your stress by knowing that while you might very well have a valid claim against your insurer, it is unlikely that the denial was made in bad faith. Most denials are made on the basis that the insurer has a different view of your claim and a different interpretation of the facts. Acts of bad faith can and do happen, but they are generally the exception rather than the rule.
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