When denying coverage based on fraud, an insurer should be clear the Ontario Superior Court of Justice has ruled. What’s more, the ruling suggests that claims of dishonest or intentional acts by the insured must be spelled out at an early stage in the proceedings. At a minimum, the insurer should clarify its position as early as possible or run the risk of exposing itself to punitive damages.
In Demetriou v. AIG Insurance Co. of Canada, the plaintiff James Demetriou claimed he had been robbed of a $550,000 heirloom ring and a gold chain while on the beach in the Dominican Republic. Shortly before trip, he had added the ring to his insurance policy. He reported the theft to local law enforcement and, back home in Toronto, to the police and his insurer.
After a thorough investigation, the insurer determined that there was insufficient information to substantiate the theft. That’s when Mr. Demetriou launched his suit.
In its statement of defence, the insurer raised the policy’s terms and exclusions. Following a motion, the Court ordered the insurer to specify whether it was relying on the policy's intentional or dishonest acts exclusions. Its counsel confirmed that the defence was based on Mr. Demetriou’s failure to prove that the theft occurred, as well as his failure to cooperate and provide enough information in the investigation. Counsel also confirmed that the insurer was not specifically relying on the intentional or dishonest acts exclusions but was reserving the right to do so, as additional evidence might become available.
Mr. Demetriou moved for summary judgment, arguing he had cooperated with the investigation and was entitled to reimbursement for the loss. In response, the insurer outlined the suspicious circumstances of the theft and various inconsistencies uncovered during its investigation. It reiterated its position that the theft had not been proven and that pleading fraud was not necessary to assert that position. However, during argument, the insurer's counsel requested that, if necessary, it be allowed to amend its statement of defence to rely on the dishonest or intentional act exclusion.
The Court held that the plaintiff had complied with his obligations under the policy and specifically rejected the insurer's argument that it was not required to plead fraud to raise “suspicious circumstances.” According to the Court, the suspicious circumstances could only be relevant if there was an allegation of an intentional or dishonest act. And given that the insurer had expressly disclaimed any reliance on those exclusions, it was simply too late to amend the pleadings to advance such a defence.
Notably, the Court awarded $50,000.00 in punitive damages the plaintiff on account of the insurer’s conduct. In doing so, it highlighted that the insurer had decided at a very early stage that it would not pay the claim, but continued to investigate without communicating this to its insured. It was also critical of the decision to disclaim any reliance on the intentional and dishonest acts exclusions even though it apparently did intend to rely on those exclusions (under the “suspicious circumstances” defence and its internal documents disclosed in the course of litigation).
There are many reasons why an insurer may be reluctant to deny a claim on the basis of fraud, and why defence counsel may advise an insurer to be cautious about relying on the dishonest or intentional act exclusion. Among other things, an unsuccessful allegation of fraud may expose an insurer to a bad faith claim. Further, as a general rule, alleging a dishonest act can expose litigants to heightened cost consequences in the event the court is not persuaded a dishonest act occurred. Because Ontario courts will enforce these exclusions only when appropriate, an insurer must weigh the risks associated with denying a potentially legitimate claim against the possibility of paying a fraudulent claim.
The decision in Demetriou also highlights how a court may react to strategic changes late in litigation. If an insurer comes to the view that an exclusion applies, it should clearly communicate it to the insured. The award of punitive damages shows that not taking a firm position — or an attempt by the insurer to "hedge its bets" — carries its own risks.