Chapter 28: Insurance PDF

Exported for Abraham Thomas Zachariah on Fri, 06 Dec 2024 16:02:55 GMT Chapter 28: Insurance OBJECTIVES After studying this chapter, you should have an understanding of the role of insurance in risk management the nature of an insurance contract, including the rights and obligation...

Exported for Abraham Thomas Zachariah on Fri, 06 Dec 2024 16:02:55 GMT Chapter 28: Insurance OBJECTIVES After studying this chapter, you should have an understanding of the role of insurance in risk management the nature of an insurance contract, including the rights and obligations of the insurer and the insured the various kinds of insurance [A] Business Law in Practice “GOTCHA” This was the message on the screen when Simon Balistar, Vice President of Operations for Sunbury Pharmaceuticals Inc, signed onto his work computer. Shortly thereafter, a second message appeared: “We have control of your operating systems and if you want control back then deposit $100 000 in Bitcoin into the following account … ” Then a third message appeared: “If the Bitcoin is not paid within the next 24 hours, then personal information about your clients and customers will be sold or released over the internet.” Simon was not sure what to do. As a research scientist who had gravitated to the operations side of the drug manufacturing business, he did not have a lot of experience in these matters. He immediately contacted Sunbury’s Chief Technology Officer (CTO) and they confirmed: “Yes, we have just discovered that ransomware has blocked access to our computer operating system, which controls the whole manufacturing process. We can try a work-around but we may need some outside consultants and it will probably take some time. In addition, data including personal information of clinical trial participants has been encrypted.” Simon did not think they should give into the hackers. The delay to the manufacturing process would be costly and the release of personal information would be problematic, but Simon knew that Sunbury had insurance. Several years ago, manufacturing had been disrupted because of extreme flooding and Sunbury had lost significant revenue. As a result, Sunbury’s operations were reviewed, and a comprehensive insurance program was put in place. At the time of the review, Simon had provided the following profile to their insurance broker: Sunbury manufactures medicines, generic pharmaceuticals, and over-the counter drug products. It also conducts clinical trials and provides a variety of support services for patients including financial support for qualifying ones. Located in North York, Ontario, its facilities are composed of the following: a manufacturing plant where raw materials are stored and products are manufactured; a waste disposal site where contaminants and by-products are housed and readied for disposal; and a distribution centre where finished products are packed and shipped to customers via Sunbury’s delivery trucks. 1. What are the Sunbury’s losses as a result of this incident? 2. Does insurance cover Sunbury’s losses? Explain. 3. Should Sunbury pay the ransom demanded? Introduction A cornerstone of an effective risk management program is insurance coverage. As discussed in Chapter 3, insurance is the primary means of transferring the risk of various kinds of losses. It permits a business to shift the risk, because through an insurance policy , the insurer promises to compensate the person or business (known as the insured ) should the contemplated loss actually occur. The insurer provides this protection in exchange for payment, known as an insurance premium , from the insured (Figure 28.1). Figure 28.1 The Insurance Relationship. The insurer provides protection against a specified loss. The insured purchases protection against a specified loss. Insurance is not a panacea for all risks, however, as insurance can be costly and is not always available (or is available only at an exorbitant cost). For example, severe weather across Canada—including floods in British Columbia and Manitoba, wildfires in Alberta and British Columbia, hailstorms in Alberta, tornadoes in Ontario, and storms in eastern Canada—have resulted in billions of dollars in payouts by insurance companies (Figure 28.2). In 2022, severe weather resulted in $3.1 billion in insured damages, up from an average of $422 million per year in the period 1983–2008. Claims related to severe weather events are expected to double to $5 billion over the next 10 years. These severe events are resulting and are likely to continue to result in higher premiums and changes in the extent of coverage. For some companies, this has meant that the insurance is so expensive that it is essentially unobtainable. It is also important to remember that insurance does not prevent a loss from occurring nor does it prevent the potential adverse publicity associated with a loss. Videos 28.1 and 28.2 elaborate on the impact of climate change on economies and insurance.  Video Please visit the textbook on a web or mobile device to view video content. Video Please visit the textbook on a web or mobile device to view video content. Quiz Question 28.1 Mark as: None Review What is the primary value of insurance to business enterprise? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a It removes all tort and contract liability risk. b It provides a means to shift risk away from the business to an insurer. c It shields directors and officers from personal liability. d It imposes a duty of utmost good faith on the business enterprise. Show Submitted Answer Show Correct Answer Check My Answer  Figure 28.2 How do extreme weather events caused by climate change affect the insurance industry? [D] An insurance policy is a contract. By the terms of the contract, the parties agree to what kind of loss is covered, in what amount, under what circumstances, and at what cost. Insurance policies are also regulated by legislation in each of the provinces. Insurance legislation serves a number of significant purposes, including the following: It mandates the terms that must be found in insurance contracts. It regulates the insurance industry generally by setting out licensing requirements for insurance companies, insurance brokers, and insurance adjusters. It puts in place a system for monitoring insurance companies, particularly with respect to their financial operation. The main goal of insurance legislation is to protect the public from unscrupulous, financially unstable, and otherwise problematic insurance companies. It also provides working rules that create stability within the industry at large. The three basic kinds of insurance are as follows: Life and disability insurance: This provides payments on the death or disability of the insured. Property insurance (also known as fire insurance): This provides payment when property of the insured is damaged or destroyed through accidents. It also can cover the costs of machine breakdown.  Liability insurance (also known as casualty insurance): This provides payment in circumstances where the insured is held legally responsible for causing loss or damage to another, known as the third party. With the exception of life insurance contracts, insurance policies can be written so that the insured pays a deductible. This means that the insured is responsible for the first part of the loss, and the insurer has liability for the balance. Agreeing to a deductible generally reduces the premiums that the insured must pay for the coverage. For example, Sunbury agreed to a $250 deductible for windshield replacement on its delivery trucks. If a Sunbury vehicle’s windshield requires replacement and the cost is $1300, Sunbury’s insurer will pay $1050. The $250 deductible is Sunbury’s responsibility, and to that extent, Sunbury is self-insured. Quiz Question 28.2 Mark as: None Review What are the three main categories of insurance? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a auto insurance, life insurance, and house insurance b life and disability insurance, property insurance, and liability insurance c fire insurance, life insurance, and professional liability insurance d life insurance, property insurance, and theft insurance Show Submitted Answer Show Correct Answer Check My Answer The Insurance Contract Duty to Disclose Insurance contracts are of a special nature. They are known as contracts of utmost good faith. A key consequence is that the insured has a duty to disclose to the insurer all information relevant to the risk; if the insured fails in that duty, the insurer may choose not to honour the policy. For example, assume that Sybil, one of Sunbury’s employees, fills in an application for property insurance. In response to the question, “Has Sunbury ever experienced a fire?” she writes, “Yes—in 2016.” Sybil does not mention that Sunbury also had a fire in 2012. Sybil has failed to disclose a fact that is germane to the insurer’s decision to insure and relevant to what the premiums should be in light of the risk. Therefore, if Sunbury tries to claim for fire loss should another fire occur at the plant, the insurer could refuse to honour the policy based on Sybil’s non-disclosure. An insurance company can deny coverage for non-disclosure even if the loss has nothing to do with the matter that was left undisclosed. For example, since Sunbury has failed to disclose a previous fire loss, the insurer can deny a vandalism claim that Sunbury might make at some future time. The law places a duty of disclosure on the insured for a straightforward reason: the insurer has to be in a position to fully assess the risk against which the insured wants protection. The only way the insurer can properly assess risk is if the insured is candid and forthcoming. In short, the insured is usually in the best position to provide the insurer with the information needed. Quiz Question 28.3 Mark as: None Review Insurance contracts are contracts of utmost good faith. Which of the following is a practical consequence of this feature of insurance contracts? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. The insurance company has a duty to disclose to the insured any matter that would affect the insured’s decision a to enter into the contract. b The insurer must not be negligent when advising the insured. c The insured has a duty to disclose all information that is material to the risk being insured. d The insured has a duty to bring all claims promptly. Show Submitted Answer Show Correct Answer Check My Answer ETHICAL CONSIDERATIONS 28.1 Genetic Testing and Insurance Advances in medical science have revealed that many diseases—colon cancer, breast cancer, cystic fibrosis, muscular dystrophy, and Huntington’s disease, for example—are at least, in part, genetic diseases. And advances in medical technology have made it possible to test for many of these conditions at a low cost. There are currently over 77 000 genetic tests that can reveal predisposition to certain cancers, degenerative diseases, metabolic disorders, and other conditions. The results of the tests can be beneficial as they can assist with diagnosis and treatment, help in mitigating the risk of triggering the disease, and aid with family planning. Despite the benefits and low costs, Canadians have been reluctant to access genetic information because of concern over the use that third parties, namely insurance companies, may make of it. Insurance contracts are contracts of utmost good faith, requiring full disclosure of material facts that may affect insurability and the insurance premium. Disclosing a genetic predisposition to certain conditions could result in the denial of insurance coverage, higher insurance premiums, or reduced insurance benefits. Failure to disclose could result in the insurance contract being voided. To address this concern and to encourage Canadians to make greater use of genetic testing, the federal government in 2017 enacted the Genetic Non-Discrimination Act. The Act makes it a crime to force an individual to get genetic testing as a condition to access goods, services and contracts; and to collect, use, or disclose the results of genetic testing without the individual’s written consent. Anyone who contravenes the Act is subject to fines of up to $1 million and prison Figure 28.3 What is the risk for insurance companies with a ban on the use of the terms of up to five years. results of genetic testing? [E] The Canadian Coalition for Genetic Fairness has welcomed the legislation as it has long argued that the disclosure of genetic test results allows for discrimination by insurance companies in that they can deny coverage to individuals based on factors that may have an uncertain relationship to disease. This is because the relationship between genes and the development of disease is complex and a person aware of a predisposition to a certain condition may take a range of preventative measures and thereby pose less risk of suffering from a condition than might otherwise have been the case. The insurance industry lobbied against the legislation on the basis that the Act will lead to higher claims costs and insurance premiums. It argued that the Act creates an incentive for individuals with high risk (those that know they have a genetic disorder as a result of a genetic test) to purchase more life insurance than they otherwise would have. As the Act prohibits insurance companies from asking for the results of genetic tests, they do not have the information upon which to charge a premium that corresponds with the higher risk and therefore the high-risk individual will not be charged a corresponding high premium for insurance coverage. More insurance may be purchased by people with higher risk than people with low risks, thereby increasing the claims costs to the insurers. As the insurers do not have means of charging a higher premium to high-risk individuals, insurers will have to charge higher premiums for everyone (Figure 28.3). In 2018, the government of Québec challenged the legislation on the basis that it was not a proper exercise of the federal government’s criminal power. The Québec Court of Appeal agreed with the Québec government and held that the goal of the Act was the regulation of contracts and the provisions of goods and services, areas of provincial jurisdiction. The Supreme Court of Canada reversed the Québec Court of Appeal decision and upheld the legislation, holding that it is a valid exercise of the federal government’s criminal law power as it deals with the threat of harm to interests traditionally protected by the criminal law—autonomy, privacy, equality, and public health. Critical Analysis Loading question... Quiz Question 28.5 Mark as: None Review What is the objective and purpose behind the Genetic Non-Discrimination Act of 2017? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a to ensure genetic testing results are available to insurance companies directly b to require individuals seeking insurance to provide any information that might affect risk c to make it illegal to require a person to undertake a genetic test or reveal test results d to reduce the fines and penalties associated with the inappropriate request for genetic test data  Show Submitted Answer Show Correct Answer Check My Answer However, the duty to disclose is not all encompassing. The insured is not required to disclose matters of common knowledge or matters in the public domain that are known or should be known to the insurer. For example, assume that in the application for property insurance Sybil notes that some welding occurs on the premises when heavy steel shelving used for bulk storage is being repaired, but she does not go on to observe that welding causes sparks, which, in turn, can cause a fire. This is not a failure to disclose—after all, the insurer is expected to know that welding may cause a fire. That said, the insured is much better to err on the side of disclosure, since a miscalculation on the insured’s part can lead to the policy being void. A duty to disclose exists not just at the time of applying for the insurance—it is an ongoing duty. The insurer must be notified about any change material to the risk (Figure 28.4). For example, if Sunbury decides to stop manufacturing drugs and turn its attention instead to manufacturing medical devices such as respirators and X- ray machines, the insurer should be advised, in writing, of this change. In the same vein, if Sunbury leaves a building vacant or relocates its operations, the insurer should be contacted so that necessary adjustments to the policy can be made. Figure 28.4 When does an insurer have a duty to disclose? [F] Quiz Question 28.6 Mark as: None Review  An insurance company can deny coverage for non-disclosure even if the loss has nothing to do with the matter that was left undisclosed. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a True b False Show Submitted Answer Show Correct Answer Check My Answer CASE 28.1 Marche v Halifax Insurance Co, 2005 SCC 6 THE BUSINESS CONTEXT: The duty of an insured to report material changes to the risk in a fire insurance policy is currently prescribed by statutory conditions in all Canadian common law provinces. This case concerns the ability of an insurance company to deny coverage on the basis of the insured’s alleged breach of the statutory condition requiring an insured to report a material change. FACTUAL BACKGROUND: Theresa Marche and Gary Fitzgerald (the insureds) purchased a house, converted it into apartments, and insured it under a fire insurance policy issued by the Halifax Insurance Co. In September 1998, the insureds left Cape Breton Island to find work in British Columbia. The house remained vacant from September to early December, when Danny, a brother of one of the insureds, moved in. Danny fell behind in the rent but refused to vacate the premises. In an effort to induce Danny to move out, the insureds had the water and electrical power disconnected. On February 7, 1999, the house was destroyed by fire. At this time, Danny’s possessions were still in the house. Halifax denied liability on the grounds that the insureds had failed to notify Halifax of the vacancy between September and December 1998. The insurer alleged that this was a breach of Statutory Condition 4 of Part VII of Nova Scotia’s Insurance Act, which provides, in part, “Any change material to the risk and within the control and knowledge of the insured shall avoid the contract as to the part affected thereby, unless the change is promptly notified in writing to the insurer.” The insured argued that, if their failure to report the vacancy constituted a breach, they should be relieved from the consequences of the breach by section 171(b) of the Insurance Act, which provides in part, “Where a contract contains any stipulation, condition or warranty that is or may be material to the risk the exclusion, stipulation, condition, or warranty shall not be binding on the insured if it is held to be unjust or unreasonable.” THE LEGAL QUESTION: Does section 171(b) of the Nova Scotia Insurance Act apply to statutory conditions? Was there a breach of Statutory Condition 4? RESOLUTION: The Supreme Court of Canada held that section 171(b) applies to both contractual and statutory conditions. In coming to this conclusion, the majority rejected the notion that statutory conditions by definition cannot be unnecessary or unjust. The court noted that as the purpose of section 171(b) is to provide relief from unjust or unreasonable insurance policy conditions, it should be given a broad interpretation. The word “condition” in section 171(b) is not qualified by a restrictive adjective, and further, a complete reading of the Act does not support the contention that “condition” in section 171(b) refers only to contractual conditions. The court stated that section 171(b) authorizes the court not only to relieve against conditions that are prima facie unjust but also to relieve against conditions that in their application lead to unjust or unreasonable results. The court noted that while the insureds had failed to report the vacancy, it is unclear whether the failure constituted a breach of Statutory Condition 4 as the vacancy had been rectified prior to the loss occurring. In any event, if the insureds were in breach, section 171(b) should be applied to relieve the insureds from the consequences of this breach. It would be unjust to void the insurance policy when the vacancy had been rectified prior to the loss occurring and was not causally related to the loss. Critical Analysis Loading question... Quiz Question 28.8 Mark as: None Review  An insured has noted on its insurance application that its restaurant has a wood fireplace, but it has omitted to comment that occasionally escaped sparks can cause a fire risk. Why would the insured be considered as having complied with its duty to disclose? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a The insured has to be in a position to fully assess the risk. b The insurer has been candid and forthcoming. c The insurer is expected to know matters of common knowledge. d The insured has to show personal judgment. Show Submitted Answer Show Correct Answer Check My Answer Insurable Interest The special nature of the insurance contract also means that its validity is contingent on the insured having an insurable interest in the thing insured. The test for whether the insured has an insurable interest is whether they benefit from its existence and would be prejudiced from its destruction. The rationale behind this rule is that allowing people to insure property they have no real interest in may, for example, lead them to intentionally destroy the property in order to make an insurance claim. If Sunbury’s bank holds a mortgage on the Sunbury’s manufacturing plant, it can purchase insurance on the plant because the bank has an insurable interest in property that is being used as security for a loan. The bank benefits from the continued existence of the plant and would be prejudiced by its destruction. Once the mortgage is paid off, the insurable interest of the bank no longer exists, and the bank cannot file a claim. Quiz Question 28.9 Mark as: None Review Kathy’s 19-year-old son, Ian, just bought his own car, and Kathy would like to purchase insurance for him in her own name as a gift while he is a student in university. What legal principle of insurance law might prevent Kathy from insuring her son’s car? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.  a Insurance contracts may only be obtained by individuals who have an insurable interest in what is being insured. b Insurance contracts must be paid for by the individual being insured. c Ian is the owner and therefore Kathy must seek his consent before insuring Ian’s vehicle. d Ian is no longer a member of the household and therefore cannot be insured under his parent’s auto policy. Show Submitted Answer Show Correct Answer Check My Answer Indemnity With the exception of life insurance contracts, insurance contracts are contracts of indemnity. This means that the insured is not supposed to profit from the happening of the insured-against event, but at most will come out even. For example, if Sunbury insured its facilities against the risk of fire with two different insurance companies, Sunbury, in the event of a loss, is entitled to collect only the amount of the loss. Sunbury cannot collect the loss from both insurance companies. However, Sunbury would be entitled to select the policy under which it will claim indemnity (subject to any conditions to the contrary). The insurer, in turn, would be entitled to contribution from the other insurer on a prorated basis. Some policies, such as property insurance policies, require the insured to have coverage for a specified minimum portion of the value of the property in order to fully recover from the insurer in the event of a fire. This requirement takes the form of a co-insurance clause, which is intended to discourage the insured from insuring the property for less than its value on the gamble that any loss is likely to be less than total. If such a clause is in place, and the insured carries less insurance than the amount specified in the clause, the insurer will pay only a specified portion of the loss, and the insured must absorb the remainder. In essence, the insured becomes a co- insurer for the amount of the deficiency (Figure 28.5).  Figure 28.5 Example of the Application of a Co-insurance Clause Long Text Description Quiz Question 28.10 Mark as: None Review BeeClean Drycleaners has an all-risks policy of insurance, which includes business interruption insurance. When BeeClean Drycleaners purchased a new dry-cleaning machine, it purchased an additional insurance policy from another insurer, which insures BeeClean from damage and for losses resulting from equipment malfunction of the new machine. The machine was broken down for nearly one month, and during that period BeeClean suffered a business loss of $8000. BeeClean has determined that they are covered for this loss under both policies and now wishes to recover this loss from its insurers. Which statement best describes this situation? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a BeeClean paid for two policies and can therefore recover $8000 from each insurer. b BeeClean will be required to recover the loss under the most specialized policy. BeeClean has committed fraud by seeking additional insurance to cover a loss already insured under another c policy. d BeeClean is only entitled to collect the amount of its loss, $8000. Show Submitted Answer Show Correct Answer Check My Answer The insurer also has what is called a right of subrogation. This right means that when an insurer compensates the insured, it has the right to sue a third party—the wrongdoer—who caused the loss and to recover from that party what it has paid to its insured. In this sense, the right of subrogation permits the insurer to “step into the shoes” of the insured and sue the wrongdoer. Subject to the policy and applicable legislation, the insurer’s right of subrogation arises only when the customer is fully indemnified for the loss. For example, suppose the sprinkler system in Sunbury’s distribution centre fails, causing extensive water damage, and Sunbury’s insurer compensates Sunbury for all of the damage. The insurer is now in a position to bring an action in the name of Sunbury against the party or parties responsible for Sunbury’s losses. Although failure of a sprinkler system is most often due to pipes freezing and bursting, cold weather is not always to blame. The designer, the installer, or the inspector of the system may be at fault and fully or partially responsible for Sunbury’s losses. The insurer only acquires the rights of Sunbury, so if Sunbury has no claim because of an exclusion of liability clause, for example, the insurer has no claim either. Sunbury is obligated to co-operate with its insurer, and any damages recovered are payable to the insurer in reimbursement of the payment to Sunbury. Any excess is payable to the insured. In addition to the right of subrogation, the insurance company will also have the right to rebuild, repair, or replace what is damaged so as to minimize its costs. It will also have the right of salvage. If, for example, stolen goods are recovered, the insurer can sell the goods to recover its costs. Insureds are also not permitted to profit from their willful misconduct. If they deliberately causes a loss, the forfeiture rule will prevent them from collecting on their insurance. For example, if an insured deliberately sets fire to their business, they cannot collect on their property insurance. Quiz Question 28.11 Mark as: None Review David’s insurer paid for the repairs that were necessary after David’s car was rear-ended. His insurer now wishes to subrogate. What does this mean? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a David’s insurer will sue the party that rear-ended David to recover the amount it paid for his repairs. The insurer will investigate the accident, and if it finds David was partly at fault, it will ask David to reimburse b them for a portion of the repair cost. David will be required to start a lawsuit at his own expense against the party that rear-ended him and provide any c funds recovered to his insurer. d The insurer will exercise its right to cancel its policy because David has been proven to be a high risk.  Show Submitted Answer Show Correct Answer Check My Answer Insurance contracts are particularly technical documents. Their content is settled to some extent by legislation, which requires standard form policies for some types of insurance. Apart from standard form policies required by legislation, there is no requirement that a policy conform to a particular format. That said, a policy will normally contain terms that specify the following: the subject matter of the insurance, the duration of coverage, the premium, monetary limits of coverage, and the period against which insurance is provided obligations that the customer must satisfy in order to preserve coverage events or circumstances, known as exclusions, that result in there being no coverage Policies generally contain a number of exclusion clauses. For example, the standard property policy excludes coverage when the insured building has been left unoccupied for more than 30 consecutive days. If a loss occurs after this point, the policy does not cover it. Other common exclusions in property insurance include damage caused by wear and tear or mould, and vandalism or malicious acts caused by the insured. Changes in standard policy terms take the form of riders and endorsements. A rider adds to or alters the standard coverage and is part of the policy from the outset. An endorsement is an alteration to the coverage at some point during the time in which the policy is in force. Quiz Question 28.12 Mark as: None Review Vida was found guilty of arson after deliberately setting fire to his failing restaurant in order to claim the insurance proceeds. What is the legal principle that prevents him from profiting from his crime? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a the duty to disclose b subrogation principle c the forfeiture rule d the indemnity rule  Show Submitted Answer Show Correct Answer Check My Answer Insurance Products Insurance is broadly divisible into three categories—life, property, and liability. However, there are many specialized insurance policies or products available to meet the risk management needs of businesses. In order to secure optimal coverage, a business should assess its particular operations and identify the particular legal risks it may encounter. For example, in its business, Sunbury faces a number of possible kinds of liabilities and losses, including the following: Injury and property damage related to the operation of Sunbury’s delivery trucks. If Sunbury’s delivery personnel drive negligently, they may be involved in traffic accidents that cause injury to other people, as well as property damage to other vehicles. Additionally, such negligence may cause injury to the Sunbury drivers themselves and damage to Sunbury vehicles. Financial loss and injury to others caused by defective products manufactured by Sunbury. If Sunbury delivers products with defects to retailers and these products are sold to consumers, consumers may suffer physical injury and financial loss for which Sunbury is potentially liable. Financial loss and injury to human patients involved in clinical drug trials. If patients suffer harmful effects from the trials, Sunbury may be liable for their losses, and if health and other records are compromised, Sunbury may be liable for breach of privacy. Injury and property damage caused by a fire, flood, or other disaster in the manufacturing plant, disposal site, or distribution centre. If Sunbury experiences a disaster, there can be a significant financial loss, since the buildings, as well as the equipment and machinery, may have to be repaired or replaced before operations can resume. Loss of profit owing to business interruption as a result of a fire, flood, or other causes of a shutdown. In the event of a fire, flood, or other disaster, Sunbury may have to suspend business operations while it rebuilds or repairs. The loss of profit could cripple the company financially and even cause its demise. Environmental damage caused by improper storage or disposal of waste products. Environmental protection legislation in all jurisdictions prohibits businesses from discharging or spilling contaminants into the environment. Legislation may also permit the government to order the party responsible to clean up or otherwise repair the environmental damage that the contaminant caused. This clean-up can be costly for the company involved. As well, Sunbury can face civil actions by those who are injured or who suffer loss because Sunbury has improperly stored or disposed of its waste products. Financial loss as a result of theft, fraud, embezzlement, forgery, or other crimes committed by employees. As Sunbury manufactures products that have a ready street market, it is particularly susceptible to their theft by employees.  Liability of directors and officers related to their duties. A wide array of legislation, both federal and provincial, imposes personal liability on directors and officers for failing to fulfill duties. Examples include duties imposed by securities legislation, environmental legislation, and corporations legislation (this is discussed in Chapter 16). As noted, another business may have different risks than Sunbury and will have different insurance products in place. For example, a business with retail space or a business that is dependent on key employees for survival or a business that provides professional advice to clients and customers have different risks than Sunbury and would have different insurance products in place. In order to address the risks identified by Sunbury, it has the following policies. Commercial Auto Insurance An automobile owner, including a business like Sunbury, is required by law to have insurance for liability arising from its ownership, use, and operation. While each jurisdiction has its own scheme in place, a common aim of these schemes is to ensure that owners are financially responsible for the liabilities that arise through use of their vehicles. Most people and many businesses do not have the assets on hand to pay off a large judgment against them; insurance provides the funds to fulfill that financial responsibility, should it arise. There are several types of auto insurance coverage. In Alberta, for example, the Standard Automobile Policy provides the insured with coverage against liability for the injury or death of someone else (third-party liability) caused by the operation of the insured vehicle. It also provides benefits to the insured for injury or death caused by an accident arising from the use or operation of the insured automobile, as well as compensation for loss or damage to the insured automobile itself. The latter is known as collision coverage. Some insureds decide not to get collision coverage because the vehicle itself is not worth very much. Third-party liability insurance, however, is not an option, and its purchase is required by law. Since a vehicle accident causing paraplegia, for example, can result in millions of dollars of damages, owners should not be content with purchasing the minimum amount required by law. The minimum amount is simply not enough to cover a catastrophic accident. If there is a deficiency between the amount of insurance coverage and the actual damages sustained by the plaintiff, the insured will be personally responsible for the difference. Each province specifies through legislation the minimum amount of coverage an owner must obtain for third- party liability. In Ontario, for example, the statutory minimum is $200 000. Since this amount is insufficient to pay damages to another who has been seriously injured, the owner should purchase additional coverage. Employees injured in car accidents on the job may have coverage through workers’ compensation legislation. Under such legislation, which is in place in every Canadian province, participating employers pay premiums into a fund administered by a tribunal. Employees who are injured in the workplace or who suffer from a disease as a result of exposure to a pollutant in the workplace, for example, can then make a claim for benefits from this fund. When an employer participates in a Workers’ Compensation Board (WCB) plan, payment from the fund is usually the only compensation the employee is entitled to receive. The legislation makes participation mandatory for most industries and business activities and prevents employees from suing the employer for losses that occur in the course of employment. Quiz Question 28.13 Mark as: None Review Which statement best describes automobile insurance in Canada? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a All provinces require owners to have a minimum of $250 000 in liability coverage for automobile accidents. b Each province has its own automobile insurance scheme. All owners of automobiles in Canada are required to have collision coverage to insure the owner for loss or c damage to the automobile itself. Automobile insurance is optional but is highly recommended for anyone who is concerned they may not have d sufficient funds to pay for large judgments. Show Submitted Answer Show Correct Answer Check My Answer Commercial General Liability Insurance The purpose of commercial or comprehensive general liability (CGL) insurance is to insure enterprises like Sunbury for liability resulting from damage caused to third parties during the course of business operations. For example, a risk faced by Sunbury is that one of its products is defective and leads to some kind of loss or damage to a consumer (third party). Sunbury’s CGL insurance will cover claims by the consumer for personal injury, loss of income, and related losses provided Sunbury is legally responsible for such losses and coverage has not been excluded. There are numerous exclusions in the standard CGL policy that may significantly narrow the scope of the insured’s coverage. For example, coverage may be excluded where coverage is provided by another policy (such as workers’ compensation or commercial automobile), where coverage requires purchase of another policy (such as pollution and cyberattacks), or where the claim is for property damage to the insured’s own product, property, and work. The latter are considered business risks within the control of the insured and are therefore excluded from coverage under the standard CGL policy. As noted, the CGL does not respond to losses directly suffered by Sunbury itself. For this type of loss, Sunbury would need a property policy with a defective product endorsement. The following examples reveal the important difference between these two kinds of policies. Example 1 Sunbury produces a drug that is seriously defective. When the customer consumes it, he becomes very ill and is unable to work. The customer incurs about $25 000 in medical, rehabilitation therapy, and related costs and $25 000 in loss of wages and other benefits—all of which is attributable to Sunbury’s defective product. Sunbury’s CGL insurance policy will cover this loss. Example 2 Sunbury produces defective drugs, which the quality assurance program in place at Sunbury detects. The drugs cannot be sold and Sunbury loses $50 000 in revenue. CGL insurance does not cover this loss because it is not a loss sustained by a Sunbury customer or other third party—it is a loss suffered directly by Sunbury itself. For coverage in this situation, Sunbury would need a property policy with a defective product endorsement. The cost of the endorsement can be high, and businesses may decide to establish an effective quality assurance and testing program, rather than looking to an insurance company for coverage. Quiz Question 28.14 Mark as: None Review How does commercial general liability (CGL) insurance differ from automobile liability insurance? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a CGL insurance protects property, whereas automobile liability insurance protects against liability. b CGL insurance is available only to corporations, whereas auto insurance is available to anyone. c CGL insurance is optional, whereas auto insurance is mandatory. d A CGL insurance policy does not have a deductible, whereas auto insurance incorporates a deductible. Show Submitted Answer Show Correct Answer Check My Answer TECHNOLOGY AND THE LAW 28.1 Cyberattacks and Cyber-Insurance Cyberattacks are prevalent and they come in various guises. Cybercriminals use an array of methods —malware, phishing, ransomware, and denial-of-service, for examples—to disable computers and computer networks and destroy or steal data. Of particular concern is ransomware, where the cybercriminal encrypts files on a computer then demands a ransom in exchange for the decryption. The Canadian Centre for Cyber Security reported that global ransomware attacks increased by 151 percent in the first half of 2021 as compared to the first half of 2020. The Canadian Internet Registration Authority reported that 17 percent of Canadian organizations surveyed experienced a ransomware attack in 2021, and 69 percent of those paid the ransom. Video 28.3 discusses the impact of ransomware attacks. Video Please visit the textbook on a web or mobile device to view video content. In Canada, the estimated average cost of investigating and remediating a cyberattack is $7 million, according to a survey conducted by IBM and the Ponemon Institute. The costs for a business can include direct costs such as the cost of restoring data, ransom payments, cost of notification of affected individuals, and crisis management. Other costs are lost sales because of disruption to business, lost productivity when the network is impacted by the cyberattack, and overtime for employees to catch up on delayed projects. A business may also suffer reputational damage and it may be sued if the cyberattack involves the leak of sensitive data. Businesses have reacted to the threat posed by cyberattacks by enacting robust security and data management policies that include multi-factor authentication, an incident response plan, and data management protocols. Regardless of the effectiveness of security safeguards, the increasing sophistication of cybercriminals means the risk of a cyberattack cannot be eliminated. Insurance is therefore an important part of the risk management plan for addressing cyberattacks. Insurance A business may have a commercial general liability (CGL) or property policy; however, they are unlikely to cover losses associated with a cyberattack. This is because insurers have increasingly inserted broad cyber risk exclusion clauses in policies. In the first decision interpreting such an exclusion, Ontario’s Court of Appeal upheld the data exclusion clause. In Family and Children’s Services of Lanark, Leeds and Grenville v Co- operatives General Insurance Company, the plaintiff was hacked, and the hacker stole confidential reports that were allegedly leaked onto two Facebook pages. A class action was commenced against FCSLL&G seeking $75 million in damages. FCSLL&G filed a claim under the CGL policy for defence. The insurer refused to defend on the basis that the insurance policy had a “data exclusion” clause that excluded coverage for claims “arising out of the distribution, or display of ‘data’ by means of an Internet Website.” The court of appeal determined that the data exclusion clause was unambiguous, and the claims asserted were covered by the clear language of the exclusion clause. The insurer did not have a duty to defend. With traditional insurance policies unlikely to respond to the costs associated with a cyberattack, organizations have turned to specialized cyber-insurance to address the risk posed by a data breach (Figure 28.6). This coverage, available as a stand-alone policy or as an endorsement to an existing policy, may cover both first party (e.g., expenses relating to breach reporting, public relations, data restoration, damage to computer systems, and business interruption loss ) and third-party risks (e.g., defence costs, cost of settlements with customers, and fines or penalties associated with breach of federal or provincial laws) There is not a standard form cyber- insurance policy; therefore, the terms, language, and scope of coverage will vary from insurer to insurer. Critical Analysis Refer to Notes section for question footnotes. Loading question...  Figure 28.6 How may purchasing cyber-insurance reduce the risk of a cyberattack for a business? [H] Quiz Question 28.16 Mark as: None Review The purpose of commercial general liability insurance (also known as CGL insurance) is to compensate business enterprises in a comprehensive way for any liabilities they incur outside the course of their normal business operations. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a True b False Show Submitted Answer Show Correct Answer Check My Answer Clinical Trial Insurance Whenever new drugs and therapies are launched, they will usually be first tested on animals and then, if the results are encouraging, on human beings. The organization carrying out the trials on humans may be liable for injuries suffered by participants because of flaws in the design of the study, negligence in how the study was carried out, failure to adequately warn of dangers, and breach of patient privacy if health or other records are compromised. Clinical trials insurance covers legal liability arising out of clinical trials and usually covers all reasonable legal costs associated with claims. Property Insurance Sunbury has insured its facilities and equipment in order to fund any rebuilding or replacement that a fire or other disaster might occasion. One of the key choices Sunbury made was whether to insure for the replacement value of its property or for the property’s actual cash value. If Sunbury had chosen the second option, it would receive from the insurance company only the value of the property at the time it was destroyed; that is, not enough to purchase a replacement. Sunbury chose the first option; therefore, it will receive a higher level of compensation from the insurer—and also pay a higher premium —but the insurer has the right to require Sunbury to actually rebuild or otherwise replace its property before it will pay out on the claim. Sunbury also chose all-risks property insurance coverage, meaning all perils are insured against unless they are specifically excluded. The risks excluded in Sunbury’s policy are earthquake, war, government seizure or destruction, wear and tear, infestation, pollution, nuclear hazard, market loss, and computer systems and electronic data losses. The other option is a named policy, which only covers the risks listed. Not surprisingly, the more perils Sunbury insures against, the higher the premiums it must pay. Quiz Question 28.17 Mark as: None Review What key decision must a business owner make when considering property insurance? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a whether to get coverage for replacement value or actual cash value b whether to exclude all or some perils from coverage c whether to negotiate a non-cancellation or severability clause d whether to negotiate to remove exclusion clauses from the policy  Show Submitted Answer Show Correct Answer Check My Answer Business Interruption Loss Insurance This kind of coverage is usually an optional add-on to the commercial property insurance. It provides Sunbury with financial compensation should it have to temporarily shut down because of an insured peril. For example, if Sunbury’s manufacturing facility is destroyed by fire (an insured peril), property insurance covers the cost of repairs or replacement. The physical loss or damage to the property triggers the business interruption insurance, which will generally cover lost income or profit and ongoing expenses such as renting temporary premises while the facility is being repaired or replaced. There are many different forms of business interruption insurance, so exactly what is covered and for how long will depend on the specific language of the policy. BUSINESS APPLICATION OF THE LAW 28.1 COVID-19 and Business Interruption Insurance COVID-19 has had a devastating effect on business. Many businesses have been forced to temporarily close; others have been forced to change the way they operate. As a result, they have lost income and have turned to their insurance policies for compensation. If the business has a policy that expressly provides coverage against pandemics, the business could receive substantial compensation. Most businesses, however, will likely not have these specific policies. Instead, they will turn to their business interruption coverage. This coverage does not insure against all business interruption but normally only insures against business interruption related to property damage. The wording in many of these policies indicate that the physical event that triggers coverage is “direct physical loss or damage to the insured property.” Insurers have generally denied coverage on the basis that business closure due to COVID-19 is not the result of physical loss or damage to the property. They argue that there has not been any harm or damage to the property resulting in closure, rather the closure is due to the risk of humans encountering COVID-19. Insureds have not agreed with this reasoning and have launched individual and class action lawsuits against the insurers who have denied coverage. For example, the Calgary Flames have launched a $125 million lawsuit against insurers over COVID-19 losses. Also, a vacation rental business in Canmore, Alberta, has commenced a $180 million class action against the insurer for business interruption losses. The insureds in both of these cases will argue that Canadian courts have not adopted a definitive definition of “direct physical loss or damage,” so it is open to interpretation as to whether COVID-19 contamination gives rise to physical loss or damage. They will also probably argue COVID-19 by its very presence contaminated their property and made it unusable, thereby giving rise to a physical loss. Thus, "closure due to COVID contamination, which is obviously a physical thing, could be sufficient to trigger coverage because of its physical nature.” The litigation between the insurers and insureds will provide answers as to whether COVID-19 contamination is a physical loss or damage that triggers business interruption insurance coverage (Figure 28.7). Critical Analysis Loading question... Figure 28.7 What are the challenges for insurance companies in attempting to insure against losses due to a pandemic? [I] Long Text Description Environmental Impairment Insurance Not only may Sunbury face substantial fines for failing to comply with environmental protection legislation and for any clean-up costs associated with a spill or other accident, but it can also be sued by its neighbours for polluting the soil or ground water. Furthermore, if a subsequent owner of Sunbury’s plant can trace pollutants back to Sunbury, it has civil liability for the clean-up and other associated costs, even though it no longer owns the land. The extensive nature of this type of liability explains why commercial general liability insurance policies usually contain pollution exclusion clauses and why environmental impairment liability policies are very expensive. A more viable—though not foolproof—alternative is for Sunbury to ensure that it has an operational management policy in place to prevent environmental accidents from happening in the first place. ENVIRONMENTAL PERSPECTIVE 28.1 The Pollution Exclusion in Commercial General Liability Policies A standard exclusion clause found in most commercial general liability (CGL) insurance policies is the absolute pollution exclusion. The clause is very broad and attempts to exclude from coverage all losses arising out of the discharge or escape of pollutants at or from an insured’s premises. The term pollutant is usually defined as including “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapour, soot, fumes, acids, alkalis, chemicals and wastes.” Interpreting the Pollution Exclusion The effect and scope of absolute pollution exclusion clauses has also been the subject of much litigation. In Zurich Insurance Co v 686234 Ontario Ltd, the Ontario Court of Appeal concluded that the exclusion clause did not apply to the escape of carbon monoxide from a negligently installed furnace in a high-rise apartment building. The court found that although carbon monoxide was a pollutant within the meaning of the exclusion, the history of exclusion clauses shows that their purpose was to bar coverage for damages arising from environmental pollution, not damages where faulty equipment caused pollution. The pollution exclusion clause was meant to apply only to an insured whose regular business activities placed it in the category of an active industrial polluter of the natural environment. It was not intended to apply to a case where faulty equipment caused the pollution. Therefore, an improperly operating furnace that produced carbon monoxide in a residential building fell outside of the exclusion. In reaching its decision, the court emphasized that insurance coverage should be interpreted broadly in favour of the insured and exclusion clauses strictly and narrowly construed against the insurer. In Precision Plating Ltd v Axa Pacific Insurance Co, the British Columbia Court of Appeal appears to have broadened the scope of the pollution exclusion clause. Precision Plating, located in Surrey, BC, operated an electroplating business in a multi-tenanted commercial building. A fire broke out at its premises activating the sprinkler system and causing vats filled with toxic chemicals to overflow and seep into neighbouring businesses. A series of lawsuits ensued in which the businesses sued Precision, alleging property damage caused by chemicals and fumes. Precision’s insurer denied coverage based on the absolute pollution exclusion in the CGL policy that excluded “Bodily Injury, Personal Injury or Property Damage caused by or contributed to or arising out of the actual, alleged or threatened discharge, emission, dispersal, seepage, leakage, migration, release or escape at any time of Pollutants ….” The trial judge, in siding with Precision, ruled that the damage to the property was caused by fire, not pollutants. The BC Court of Appeal overturned the decision, holding that Precision’s liability was due to the escape of pollutants, a liability explicitly excluded by the pollution exclusion clause. In other words, while the damage may have been caused by the fire, Precision’s liability was caused by the escape of the pollutants (Figure 28.8). The court stated, “Precison reasonably expected that it would be indemnified against any liability for damage to neighbouring properties from a fire on its property. But it could have no reasonable expectation that it would be indemnified against liability for the escape of chemicals from the vats” (at para 56). Leave to appeal to the Supreme Court of Canada has been denied. Critical Analysis Loading question... Sources: Samantha Ip & Daniel Paperny, “The Pollution Exclusion—Focus on Causation”, Clark Wilson LLP (10 September 2015), online: https://www.cwilson.com/the-pollution-exclusion-focus-on-causation/; Canadian Underwriter, “Supreme Court of Canada Will Not Hear Appeal Over Commercial General Liability Policy With Pollution Exclusion” (18 January 2016), online: https://www.canadianunderwriter.ca/insurance/supreme-court- of-canada-will-not-hear-appeal-over-commercial-general-liability-policy-with-pollution-1003982248/.  Figure 28.8 How may the actual business activities of the insured affect the application of the absolute pollution exclusion? [J] Commercial Crime Insurance Employee theft costs Canadian businesses about $1.4 billion dollars every year. Sunbury is vulnerable to employee theft, embezzlement, forgery, and other crimes. It is particularly vulnerable to theft of drugs because of their portability and high street value. Commercial crime insurance provides compensation to Sunbury for the dishonest acts of their employees. Employers like Sunbury could bring action against the dishonest employee for recovery of losses, but many do not report the crime and of those that do, many do not recover anything. Directors and Officers Liability Insurance Corporate directors and officers face liability for their errors and omissions related to operating the company. An array of federal and provincial legislation imposes personal liability for such matters as failing to remit taxes or pay wages, misrepresenting information in a prospectus, using confidential information in buying and selling securities and permitting the release of toxic substances into the environment (this is covered in Chapter 16). These risks can be insured against through directors and officers (D&O) liability insurance. D&O insurance typically provides the following: coverage for directors and officers against losses that are not reimbursed by the corporation; coverage for the corporation for amounts paid to indemnify directors and officers for their losses; and/or coverage to protect the corporation from claims arising from securities litigation. Remedies of the Insured Against the Broker It was crucial for Sunbury to establish a solid working relationship with an insurance broker in order to secure proper advice as to what kind of insurance it required. The term insurance broker refers to the middle person between the insurance companies and the insured. As the party who sought insurance, Sunbury needed the assistance of the broker in reviewing its business operations, assessing the risks it faces, and understanding the coverages available and the policy costs. If Sunbury did not spend sufficient time with the broker or if it chose a broker who was simply not up to the job, Sunbury may have ended up with the wrong coverage—or not enough coverage—and face a loss against which it has not been properly insured. If Sunbury’s broker failed to provide advice about the right coverage for its risks or failed to point out gaps in its coverage, it may have an action against its broker for negligence. If Sunbury is successful in its action, the broker will be required to reimburse Sunbury for any of its underinsured or uninsured losses or liabilities. CASE 28.2 Alvaro v InsureBC (Lee & Porter) Insurance Services Inc, 2021 BCCA 96 THE BUSINESS CONTEXT: When an insurance claim is properly denied, an insured may consider whether there is a claim against the broker who secured the policy under which the claim was denied. FACTUAL BACKGROUND: A commercial landlord owned a number of rental properties, which it insured for many years through the defendant broker. The landlord evicted a tenant from one of the properties, and while the property was vacant for renovations, repairs, and clean-up, it was destroyed by fire. The insurer denied the claim because the policy contained a vacancy exclusion. The insurance had been renewed about eight months prior to the fire, and while the broker knew the property was being used as a rental property, it did not advise the landlord of the vacancy exclusion. The landlord did not read the policy and therefore was unaware of the exclusion. The landlord sued the broker for failing to bring the exclusion in the policy to their attention. THE LEGAL QUESTION: Was the broker negligent in failing to bring the exclusion in the policy to the attention of the landlord? RESOLUTION: The court held that the broker breached the duty of care. The court emphasized that brokers need to provide information and advice to ensure that insureds either get the right coverage for their risks or are informed of gaps in their coverage. The broker breached the duty by failing to specifically inform the landlord of the vacancy exclusion at the time of renewal. The broker knew the property was a rental unit, which would imply periods of vacancy between tenants. There was no evidence that the broker had given advice to the landlord on how to avoid this coverage gap through a vacancy endorsement. The landlord was not found contributory negligent for failing to read the policy. The broker’s negligence flowed primarily from the failure to advise of how a gap in coverage might be avoided by a vacancy endorsement; the landlord did not contribute to that failure by failing to read the policy. Critical Analysis Loading question... Against the Insurance Company When an insured makes a claim under its policy, an insurance adjuster will likely investigate the events and evaluate the loss. On the adjuster’s advice, the insurer will offer to settle the claim. There may be disagreements between the insured and the insurer as to the nature or amount of coverage. Should they be unable to resolve these differences, the insured may have to sue the insurer for breach of contract. The claim will be that the insurer has failed to honour its obligations under the policy. In addition to the obligations specified in the insurance policy, an insurer owes the insured a duty of good faith, including a duty to deal with an insured’s claim in good faith. Factors considered in determining whether an insurer has fulfilled its obligation to act in good faith include whether the insurer carried out an adequate investigation of a claim, whether the insurer properly evaluated the claim, whether the insurer fairly interpreted the policy, and whether the insurer handled and paid the claim in a timely manner. When the duty of good faith has been breached, the court may award punitive damages, as was done in Whiten v Pilot Insurance Co discussed in Case 28.3. Quiz Question 28.21 Mark as: None Review An insurance adjuster is one who acts for an insurance company in selling insurance. Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a True b False Show Submitted Answer Show Correct Answer Check My Answer CASE 28.3 Whiten v Pilot Insurance Co, 2002 SCC 18 THE BUSINESS CONTEXT: An insurer’s bad-faith conduct—alleging fraud when none exists or refusing to pay out under a policy, for example—can have a devastating effect on the insured. This kind of reprehensible conduct by the insurer can be addressed by an award of punitive damages. Prior to this decision, the highest punitive damage award handed down by a Canadian court against an insurance company had been $15 000. FACTUAL BACKGROUND: In January 1994, the Whitens’ family home burned down in the middle of the night, destroying all their possessions and three family cats. Knowing that the family was in poor financial shape, the insurer, Pilot Insurance, made a single $5000 payment for living expenses and covered the rent on a cottage for a couple of months. Pilot then cut off the rent without telling the family, and thereafter it pursued a confrontational policy that ultimately led to a protracted trial. Pilot maintained that the Whitens had burned down the house, even though it had opinions from its adjuster, its expert engineer, an investigative agency retained by it, and the fire chief that the fire was accidental. After receiving a strong recommendation from its adjuster that the claim be paid, Pilot replaced the adjuster. Counsel for Pilot pressured its experts to provide opinions supporting an arson defence, deliberately withheld relevant information from the experts, and provided them with misleading information to obtain opinions favourable to an arson theory. Pilot’s position was wholly discredited at trial. The jury awarded compensatory damages and $1 million in punitive damages. The majority of the Court of Appeal allowed the appeal in part and reduced the punitive damages award to $100 000. THE LEGAL QUESTION: Should the jury’s punitive damages award be restored? RESOLUTION: The court held that, although the jury’s award of punitive damages was high, it was reasonable. Pilot’s conduct had been exceptionally reprehensible. Its actions, which continued for over two years, were designed to force the Whitens to make an unfair settlement for less than what they were entitled to receive. The jury believed that Pilot knew its allegations of arson were not sustainable and yet it persisted. Insurance contracts are purchased for peace of mind. The more devastating the loss, the more the insured is at the financial mercy of the insurer, and the more difficult it may be to challenge a wrongful refusal to pay. The jury decided that a strong message of denunciation, retribution, and deterrence needed to be sent to Pilot. The obligation of good-faith dealing requires that the insurer must respect the insured’s vulnerability and reliance on the insurer. It was this relationship that was outrageously exploited by Pilot. An award of punitive damages in a contract case is permissible if there is a separate actionable wrong. In addition to the contractual requirement to pay the claim, Pilot was under an obligation to deal with the insured in good faith. The breach of this separate obligation supports a claim for the punitive damages. The award of $1 million in punitive damages was more than the court would have awarded but was still within the high end of the range where juries are free to make their assessment. Critical Analysis Loading question... Since Whiten, it is invariably the case that litigation against an insurer will include allegations of bad faith and a claim for punitive damages. Appellate courts, however, following the Supreme Court of Canada decision in Fidler v Sun Life Assurance Company of Canada [Fidler], have exercised restraint and have only awarded punitive damages in exceptional cases. In Fidler, the court stated that the duty of good faith requires an insurer to deal with the insured’s claim fairly in both the manner of investigating and the decision whether to pay. An insurer must not deny coverage or delay payment in order to take advantage of an insured’s economic vulnerability or to gain bargaining leverage in negotiating a settlement. However, a finding of lack of good faith does not lead inexorably to an award of punitive damages. While a lack of good faith is a precondition, a court will only award punitive damages if there has been malicious, oppressive, or high-handed misconduct that offends the court’s sense of decency. Quiz Question 28.23 Mark as: None Review Which of the following statements most accurately describes the legal basis for the court’s award of $1 000 000 in punitive damages against the insurer in Whiten v Pilot Insurance Co? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. Insurers owe the insureds a duty to deal with them in good faith; reprehensible conduct that breaches the duty of a good faith can result in an award of punitive damages against the insurer. Insurers who wrongfully deny claims and allege fraud by an insured can be sued for defamation; if the insured is b successful, punitive damages will be awarded against the insurer. Insurers have a legal duty to investigate a claim brought by an insured; failure to investigate the claim will result in c punitive damages awarded against the insurer. Insurers have an obligation to hire experts to help investigate claims made by an insured; failure to do so will d result in an award of punitive damages against the insurer for breach of the duty of good faith. Show Submitted Answer Show Correct Answer Check My Answer Business Law in Practice Revisited 1. What are the losses associated with this incident? As noted in Technology and the Law 28.1: Cyberattacks and Cyber-Insurance, the estimated average cost of investigating and remediating a cyberattack in Canada is $7.0 million. The losses/costs for a business can include direct costs such as the cost of restoring data, ransom payments, cost of notification of affected individuals, and crisis management. Other costs are loss sales because of disruption to business, lost productivity when the network is impacted by the cyberattack, and overtime for employees to catch up on delayed projects. A business may also suffer reputational damage, and it may be sued if the cyberattack involves the leak of sensitive data. 2. Does insurance cover Sunbury’s losses? Whether insurance covers Sunbury’s loses is dependent on the wording of the insurance policies purchased by Sunbury. That said, traditional liability and property insurance policies are unlikely to cover losses associated with a cyberattack. That is because these policies, particularly in the wake of widespread cyberattacks, contain broad exclusion clauses. The same is the case for clinical trial insurance in that it would also normally contain an exclusion for cyber-related losses. Sunbury’s losses would only be covered if had a specialized cyber risk insurance policy that fills the gaps and exclusions in traditional insurance coverage. However, even if such a policy were in place the coverage limit may be below the costs incurred by Sunbury. 3. Should Sunbury pay the ransom? This is a difficult question to answer. It is common for companies to pay the ransom (CIRA’s 2021 Cybersecurity Report indicates that about 69 percent of victims paid the ransom), but some companies do not pay. And even the cyber experts cannot agree on whether the ransom should or should not be paid. Companies that pay the ransom do so to minimize the disruptions to their operations particularly when the disruption affects the lives of other people. Also, paying the cyberattackers is quicker and easier than reconstructing their data from backups, assuming there are backups. This may not be an option if both the original data and the backup are encrypted. Also, the cyberattackers may have stolen data before they have encrypted it and threaten to release it if they are not paid; in this case reconstructing the data does not prevent its sale or release. Companies that do not pay the ransom often make this decision because they are able to recover their data from backups or through a decryption tool. Even if the company is not able to recover their data, many security experts and law enforcement agencies recommend not paying because paying a ransom encourages the cyberattackers to carry out more attacks. Also, paying a ransom does not guarantee a return of all of the data, and it does not guarantee that a further demand for money will not be made once the initial ransom is paid. Regardless of the decision that Simon makes, there will be many challenges for Sunbury including restoring data and systems, fixing the security hole that allowed access to Sunbury’s systems and data, and reassuring customers and patients. Chapter Summary Insurance is one of the simplest and most cost-effective means of managing risk in a business environment. It permits the business to shift such risks as fire, automobile accidents, and liability for defective products onto an insurance company in exchange for the payment of premiums by the business. An insurance contract is a contract of utmost good faith. This means that the insured must make full disclosure at the time of applying for insurance, as well as during the life of the policy. Failure to do so may permit the insurer to deny coverage when a loss has occurred. The insured must have an insurable interest in the item insured to prevent moral hazards. The test for insurable interest is whether the insured benefits from the existence of the thing insured and would be prejudiced from its destruction. Insurance contracts are not intended to improve the position of the insured should the loss occur. Rather, they are contracts of indemnity and are intended to compensate the insured only up to the amount of the loss suffered. When the insurer pays out under an insurance policy, it has the right of subrogation. This right permits the insurer to sue the wrongdoer as if it were the party that had been directly injured or otherwise sustained the loss. A business needs to communicate effectively with its insurance broker, as well as its insurance company, in order to assess the kinds of risks its operation faces and the types of insurance coverage that can be purchased to address those risks. Though insurance policies can take a variety of forms, there are three basic kinds: life and disability insurance, property insurance, and liability insurance. More specific insurance policies are simply a variation on one of these types. Insurance policies are technically worded and often contain exclusion clauses. These clauses identify circumstances or events for which coverage is denied. They may also identify people for whom coverage is denied. If the insured ends up with insurance of the wrong type or in an inadequate amount, it may have an action against its broker for breach of contract and/or negligence. If the insurance company wrongly refuses to honour the policy, the insured may have to sue the insurer to obtain compensation for its losses. Chapter Study Key Terms and Concepts all-risks property insurance Insurance coverage that protects property against all types of physical loss or injury arising from an external cause unless specifically excluded. deductible The part of a loss for which the insured is responsible. duty to disclose The obligation of the insured to provide to the insurer all information that relates to the risk being insured. endorsement Written evidence of a change to an existing insurance policy. forfeiture rule A rule that provides that a criminal should not be permitted to profit from a crime. insurable interest A financial stake in what is being insured. insurance adjuster One who investigates and evaluates insurance claims. insurance policy A contract of insurance. insured One who buys insurance coverage. insurer A company that sells insurance coverage. premium The price paid for insurance coverage. rider A clause altering or adding to coverage in a standard insurance policy. salvage An insurer’s right to title of what remains of property after paying for a total loss. Questions for Review Refer to Notes section for question footnotes. Loading question... Loading question... Loading question... Loading question... Loading question... Loading question... Loading question... Loading question... Loading question... Loading question... Loading question...  Loading question... Loading question... Loading question... Loading question... Loading question... Loading question... Questions for Critical Thinking Refer to Notes section for question footnotes. Loading question...  Loading question... Loading question... Loading question... Loading question... Loading question... Situations for Discussion Refer to Notes section for question footnotes. Loading question... Loading question...