Duty of Good Faith

Study guide: Exam 6C

The Duty of Good Faith is the mutual obligation of insurer and insured to deal with each other honestly and fairly. It runs in both directions: the insured must disclose material facts truthfully, and the insurer must investigate, evaluate and pay claims promptly and fairly, giving the insured's interests equal consideration to its own.

The duty arises because the insurance contract is one of utmost good faith (uberrimae fidei): the insurer relies on facts only the applicant knows, and the insured relies on a promise only the insurer can perform, years later, when they are least able to enforce it.
On the insured's side: the duty to disclose material facts on application, to report claims honestly, and to cooperate in the investigation. Breach — material misrepresentation or fraud — can void the policy or forfeit the claim.
On the insurer's side: to investigate fairly and promptly, to interpret the policy reasonably, to give reasons for a denial, to settle within limits where the insured's exposure warrants it, and not to use its superior position to force a discounted settlement from a vulnerable claimant.
The imbalance of power is the point. A claimant who has just suffered a loss usually needs money immediately and cannot fund years of litigation. Canadian courts have repeatedly said that this vulnerability is what makes the insurer's duty more than a contractual formality — the breach of which supports Bad Faith Damages and, in serious cases, Punitive Damages.
The duty is continuing: it applies at application, through the policy term, and — most importantly — throughout claims handling and any litigation that follows.
In Quebec the same obligation arises from the Civil Code of Québec's general duty of good faith rather than from common-law insurance cases, with substantially similar effect.

Where the Line Falls Classify each insurer action as legitimate claims handling or a breach of the duty of good faith.

Denying a claim after an investigation concluding the loss is excluded, with written reasons.

Requiring a claimant to submit the same medical documentation four times over eighteen months while paying nothing.

Offering $\$30{,}000$ on a claim the adjuster's own file values at $\$95{,}000$ , knowing the claimant is unable to pay their mortgage.

Reserving rights while investigating, and defending under a reservation of rights.

Answer

Legitimate. An insurer is entitled to deny a claim it reasonably believes is not covered. The duty requires a fair process and reasons, not a particular outcome — a good-faith denial that turns out to be wrong is a breach of contract, not bad faith.

Breach. Delay used as leverage. Repeated demands for material already provided, with no payment and no decision, is the classic pattern Canadian courts identify as bad faith.

Breach, and the aggravating facts are on the record: the insurer's own valuation contradicts its offer, and it is exploiting known financial distress. This is the fact pattern that produces Punitive Damages.

Legitimate, and in fact the correct procedure where coverage is uncertain — it preserves the insurer's coverage position while it meets its Duty to Defend. Failing to reserve rights can waive the coverage defence entirely.

The distinction running through all four: good faith regulates the process and the motive, not the answer. An insurer may be wrong in good faith; it may not be slow, opaque or coercive.