"Bad faith" is not a claim governed by the insurance contract

March 2012

Michael Kennedy

By Michael Kennedy, Partner
Published in McCague Borlack's Transportation Newsletter

The Ontario Court of Appeal released a decision on March 22, 2012, that deals with an insurer's alleged failure to settle a third party claim in a timely manner. The court decided that this claim for "bad faith" is not a breach of contract, but rather a breach of the independent duty to act in the utmost good faith.

Dundas v. Zurich Canada (2012 ONCA 181) involved a motor vehicle accident in which plaintiffs sued an at-fault motorist for an amount in excess of the insured's policy limits. The insured claimed that the insurer's failure to settle the claim in a timely manner was a breach of its duty to act in good faith, as it increased the interest that would be awarded against the insured. The insured assigned his right of action against the insurer to the plaintiffs in exchange for them not pursuing their judgment against the insured personally.

The insurer brought a summary judgment motion arguing that the action against it was statute-barred. The insurer argued that the assigned action was a claim under the contract, for which the one-year limitation period (prescribed by the statutory conditions applicable at the time) applied. The motions judge agreed and dismissed the claim.

The plaintiffs appealed and the Court of Appeal held that the action was a claim for breach of good faith, not a claim under the contract. As such, the relevant limitation period was six years as opposed to one (as this action was commenced before the Limitations Act, 2002 was in force). Also, the limitation period was only triggered once the insured's loss had been ascertained by a judgment against the insured after trial of the issue or by agreement between the parties with the written consent of the Insurer. The action was therefore not statute-barred and was allowed to proceed.

This case is important to insurers for the following reasons:

1. An action for breach of good faith will be governed by the basic limitation period as opposed to the contractual limitation period prescribed by the Insurance Act or other instrument.

2. The limitation period for such actions is only triggered once a judgment has been obtained or the case has settled with the insurer's consent.

3. It serves as a reminder to insurers of their common law duty to settle a claim against an insured in a timely manner and within the insured's policy limits. Since automobile policy limits are exclusive of applicable interest, an insurer's failure to settle a claim reasonably quickly could open insureds to significant personal exposure. Insurers have a duty to protect their insureds against this exposure. One option suggested by the court would be for insurers to place an insured's policy limits into an interest yielding account once insurers become reasonably aware that the entire policy limits may be exhausted by an award of damages.

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