Executive Summary: Key Legal and Evidentiary Issues

• Insured claimed pure economic loss resulting from an allegedly negligent insurance investigation.

• Central legal issue was whether the insurance investigator owed a duty of care to the insured.

• Plaintiff argued the case fit within the recognized category of negligent performance of a service.

• The court found no proximate relationship between the insured and the investigator to establish such a duty.

• Even assuming a prima facie duty existed, policy reasons militated against recognizing it.

• The claim was struck on the basis that no reasonable cause of action was disclosed and no causation was properly pleaded.

Facts of the case

In October 2018, Smitten Baby Products Inc., a baby products manufacturer in Stratford, Ontario, suffered water damage at its commercial warehouse. Rainwater entered the building due to a displaced tarpaulin during renovations. Smitten Baby submitted an insurance claim to several insurers under a policy administered through Lloyd’s syndicates and other Canadian insurers.

The insurers appointed ClaimsPro Inc. as their adjuster, who in turn hired FirstOnSite Restoration Limited (FOS) to investigate the loss. Representatives from FOS attended the premises shortly after the incident, conducted inspections, and submitted a report to ClaimsPro. According to Smitten Baby, FOS’s report suppressed evidence that supported coverage and instead backed a pre-determined denial of the claim based on "seepage or leakage," an exclusion under the insurance policy.

Dissatisfied with the claim handling and the delay in payment, Smitten Baby launched a lawsuit in 2019 against the insurers, ClaimsPro, FOS, and several others. It claimed economic losses, including reputational harm, loss of clients, interest on emergency loans, and eventual business failure. Smitten Baby alleged that FOS acted negligently in its investigation and owed a duty of care directly to the company.

Court’s legal analysis and outcome

The court focused on whether FOS, retained by the insurers, owed a legal duty of care to Smitten Baby, the insured. The plaintiff argued that the case fell within a recognized category of pure economic loss—namely, the negligent performance of a service. The court rejected this argument, explaining that merely referencing an established category is insufficient. To succeed, Smitten Baby needed to plead facts showing FOS undertook responsibility to Smitten Baby and that Smitten Baby reasonably relied on it.

Upon examining the pleadings, the court found no such undertaking by FOS to the insured and no facts showing reliance. On the contrary, Smitten Baby rejected the FOS report and retained its own consultants. Therefore, the necessary legal proximity between the parties did not exist.

The court acknowledged that even if a prima facie duty of care could be established using the Anns/Cooper framework, it would be negated by broader policy concerns. These included the risk of conflicting duties between the investigator and insurer, and the fact that insurance contracts already provide remedies for bad faith and delay. Recognizing a tort duty would distort contractual relationships and create practical complications.

Additionally, the court found the claim lacked properly pleaded causation. Smitten Baby did not show that any act or omission by FOS was a factual cause of its alleged losses, especially since the denial decision predated FOS’s report and payment was ultimately made.

Based on these findings, the court held it was plain and obvious that no duty of care was owed and that the action against FOS disclosed no reasonable cause of action. The claim against FOS was dismissed in full, with no leave granted to amend the pleadings.