Clients whose long-term disability benefits have been denied, often ask whether they are entitled to damages for “pain and suffering” and express their desire to “punish” the insurance company for what it has done to them by denying their claim. After all, many clients have had to cash in their savings, refinance their homes, some may have lost their jobs, friends and spouses, or perhaps the stress of having to deal with the insurance company and with their financial circumstances have aggravated their medical conditions or caused new health issues, such as depression and anxiety. Understandably, clients feel the insurance company should be punished and should compensate them, not only for their benefits, but also for the mental and financial distress they endured as a result of the denial of their benefits and as a result of how they were treated by the insurance company during the course of their claim and during the litigation.
It is often difficult for clients to understand that while they may have suffered substantially due to the denial of their claim, there are very limited circumstances in which an insurance company will be ordered to pay damages for bad faith and the facts and evidence required to prove these claims are not present in all cases. This blog will consider the case law on this topic to assist in determining whether bad faith damages are warranted in a long-term disability benefit case.
The recent case law on this topic give clients hope that their bad faith claims will be successful in certain circumstances and remind insurance companies that their conduct has the very real potential to attract significant aggravated and punitive damage awards—awards which have previously been a rare occurrence in life and disability claims in Canada.
In Branco v. American Home Assurance  SKCA 71 (Saskatchewan Court of Appeal), the Court initially awarded a combined total of $4.5 million in punitive damages against the two defendant insurers (450% more than the one million dollar punitive damages award in Whiten in 2002) and $450,000 in aggravated damages. The Saskatchewan Court of Appeal later reduced bad faith damages substantially to $675,000 in punitive damages and $45,000 in damages for mental distress; amounts more in line with the case law. However, the Court reinforced the insurer’s obligation to act in good faith in assessing and litigating long-term disability claims.
The facts in Branco are such that Mr. Branco was a welder working for a Canadian company at a mine in Krygyzstan when a steel plate fell on his foot causing him to become totally disabled. Mr. Branco made claims for workers compensation benefits under an American Home Assurance Company policy and for long-term disability benefits under a group Zurich Life Insurance policy. He was found to be permanently disabled by numerous doctors who assessed him at the request of the insurers. The Court found that Zurich breached its duty of good faith by ignoring the medical evidence of their own experts, delaying dealing with the claim, and making significantly discounted offers despite acknowledging coverage. With respect to American Home, the Court found it had breached its duty of good faith when it “discontinued payment of benefits in order to create hardship on the insured to force him into accepting an extremely low offer of settlement.” The Court concluded that the damages award was justified based on the insurers’ failure to consider overwhelming medical evidence of disability, the deliberate behavior of the insurers and their lawyers in their negotiations with the Plaintiff and their general disregard for the vulnerability and hardship suffered by Mr. Branco. In explaining his rationale for the punitive damages award, Acton J. states:
“It is hoped that this award will gain the attention of the insurance industry. The industry must recognize the destruction and devastation that their actions cause in failing to honour their contractual policy commitments to the individual insured.”
In Fernandes v. Penncorp, 2014 ONCA 615 (Ontario Court of Appeal), the Court awarded a more modest, $100,000 in aggravated damages and $200,000 in punitive damages. In both cases, the aggravated damages awarded exceed the $20,000 award for mental distress, in the 2006 Supreme Court of Canada decision of Fidler v. Sun Life Assurance. The Ontario Court of Appeal later reduced the aggravated damages (mental distress) claim in Fernandes from $100,000 to $25,000 on the basis that mental distress damages are meant to be compensatory and an award that was four times what was claimed was punitive.
The facts in Fernandes are such that, Mr. Fernandes was a bricklayer with limited education, training and experience. He suffered a number of injuries which prevented him from working. He submitted a claim for disability benefits under an individual insurance policy. The insurer denied benefits on the basis that Mr. Fernandes failed to satisfy the definition of “totally disabled” under the policy. The insurer relied on over 140 hours of surveillance of Mr. Fernandes completing various home maintenance tasks, including: moving furniture, lifting wheelbarrows and tools and shoveling cement. Rather than accepting the activities observed on surveillance as evidence of Mr. Fernandes’ functionality, the Court concluded that the surveillance was unreliable because it failed to provide any details as to what Mr. Fernandes was doing off-camera, while recuperating. The Court determined that that the insurer had acted in bad faith by refusing to accept the overwhelming medical evidence before it and by failing to demonstrate that it had properly considered the duties required to work as a bricklayer.
Although the Court awarded punitive damages as a result of bad faith conduct in both Fernandes and Branco, it was only in Branco that the Court considered the degree of the behavior warranting punitive damages. The Court held that the insurer’s “aggressive non-activity” amounted to bad faith and also met the test for an award of punitive damages. Whereas in Fernandes, the Court automatically awarded punitive damages due to bad faith, without explicitly considering the degree of the bad faith conduct.
The decision in Whiten v. Pilot Insurance,  1 SCR 595 (Supreme Court of Canada) requires the Court to consider whether the degree of the bad faith conduct warrants an award of punitive damages or whether other types of damages will adequately serve to compensate the plaintiff and deter the defendant’s behavior. In cases where there may be evidence of some bad faith conduct but not sufficient evidence of a degree bad faith warranting punitive damages, aggravated damages may still be in order.
The Supreme Court of Canada’s decision in Fidler v. Sun Life Assurance Co. of Canada,  2 SCR 3 (Supreme Court of Canada) remains the leading case with respect to aggravated damages in long-term disability cases. In Fidler, the Court reversed the punitive damages award, but maintained the aggravated damages award. It concluded that there was no requirement to show an independent actionable wrong (such as a breach of good faith) to compensate plaintiffs for mental distress in the face of a breach of a peace-of-mind contract, such as a disability policy. In applying the rule in Hadley v. Baxendale, the Court held that the mental distress suffered by Ms. Fidler was of a degree sufficient to warrant compensation of $20,000. The Court relied on extensive medical evidence, documenting Ms. Fidler’s stress and anxiety arising out of the loss of her disability coverage. Although the insurer’s strategy to pay the arrears and interest one-week prior to trial was not, in this particular case, considered sufficient bad faith conduct, the Court did conclude that the late offer did not adequately compensate Ms. Fidler for the psychological consequences of Sun Life’s breach of contract. The result was a compensatory award, as opposed to punitive.
In the case of Brine v. Industrial Alliance, 2016 NSCA 3 (Nova Scotia Court of Appeal), the insured Mr. Brine was totally disabled and was covered by a long term disability policy issued by Industrial Alliance. The insurer accepted coverage and paid disability benefits. However, when Mr. Brine recovered amounts from other sources, the insurer stopped paying any disability benefits in order to recover these amounts. Mr. Brine entered bankruptcy and even after his discharge from bankruptcy, the insurer did not resume payment of his disability benefits until the overpayments were recouped. Mr. Brine claimed that the insurer had breached the terms of the policy, on recovery of overpayments, and the insurer’s duty of good faith. The insurer also claimed another amount that Mr. Brine had received from a human rights complaint. The trial judge held that the policy did not entitle the insurer to completely stop the payments, in order to recover the overpayment. Rather, the policy required the insurer to prorate its recovery over time. The judge awarded Mr. Brine damages for the insurer’s breach of the policy. The judge determined that the insurer had breached its duty of good faith in several respects. The judge awarded Mr. Brine $30,000 for mental distress, $150,000 aggravated damages and $500,000 punitive damages.
Court of Appeal of Nova Scotia in Brine, later reduced mental distress damages from $180,000 to $90,000 and punitive damages were reduced from $500,000 to $60,000, taking issue with how punitive damages were quantified and finding that the trial Court’s punitive damages award was disproportionately high.
While the three cases (including the appeal decisions) of Branco, Fernandes and Brine may serve to heighten the insurance defendants’ sensitivity to issues of bad faith in long-term disability claims and incite more bad faith claims from plaintiffs, each case is unique and the merits of such claims should be assessed on a case by case basis. A careful and critical review of the claims file and an appreciation of the insured’s vulnerability can provide a preliminary assessment of the strength of a bad faith claim and a basis upon which to structure the examination for discovery of the insurer and the strategy for the ongoing litigation.
In assessing the merits of a claim for bad faith, it is important to realize that although a claims file may be riddled with errors, those by themselves do not constitute bad faith. Similarly, the incorrect denial or termination of disability benefits is not in itself evidence of bad faith (Fidler v. Sun Life Assurance Co. of Canada). The Court must find that the conduct was high-handed, arbitrary, malicious or reprehensible to offend the Court’s sense of decency and therefore worthy of punishment. Vulnerability of the insured is also an important consideration.
The question then is what types of conduct constitute bad faith in a long-term disability claim? While not an exhaustive list, the case law provides a number of examples of bad faith conduct occurring in the course of the adjudication of the disability claim and ongoing, through the course of the litigation. These examples include:
Ignoring overwhelming medical evidence to the effect that the claimant was disabled;
Disregarding the financial and emotional hardship suffered by the claimant;
Terminating benefits after not receiving an update from a doctor which had been appointed by the insurer;
Terminating benefits for non-compliance with programs that were unsuitable to the insured’s age, skills, and previous earning potential and were not within commuting distance of the insured’s home
Making unreasonably low settlement offers and improperly deducting legal costs incurred by the insurer from those offers;
Denying benefits for an egregiously long period of time, then finally providing a lump sum payment when the insured would have benefited more from payments over time, as was the purpose of the insurance contract;
Engaging in the above conduct with knowledge that the insured’s claims were covered;
Engaging in the above conduct with knowledge that the devastating effect it was having on the insured’s wellbeing; and
Engaging in the above conduct for the purpose of exerting financial pressure on the insured in order to induce settlement.
In evaluating the conduct and whether it amounts to bad faith, the Courts in Branco, Fernandes and Brine, relied on Whiten v. Pilot Insurance. Whiten continues to be the leading authority for punitive damages cases in Canada. In that case, Binnie J. set out the following factors to be considered in assessing the particular conduct for bad faith:
Whether the defendant’s misconduct was planned and deliberate;
The intent and motive of the defendant;
Whether the defendant persisted in the outrageous conduct over a lengthy period of time;
Whether the defendant concealed or attempted to cover up the misconduct;
The defendant’s awareness that its conduct was wrong;
Whether the defendant profited from the misconduct; and
Whether the interest violated by the misconduct was known to be deeply personal to the plaintiff.
These cases serve to remind insurers of their duty to act in good faith during the course of the claim and in litigation, while considering the vulnerability of the claimant or else risk attracting bad faith damages.
Therefore, when clients ask if they will get compensated for their “pain and suffering” in long-term disability cases or whether they can “punish” the insurer for their actions, the answer is, “that depends”. Only a critical review of the insurance claims file, a thorough examination for discovery of the insurance company and persuasive evidence supporting damages suffered by the client will determine whether there is a true bad faith claim, worthy of pursuit.
If you believe that your long-term disability benefits have been wrongfully denied or terminated and you wonder if you have a claim for damages, please contact a lawyer specializing in long-term disability litigation.
MK Disability Lawyers has over 20 years experience between its two partners, litigating long-term disability claims. We are provide expert, personalized legal representation to disabled clients whose claims were denied for any number of reasons at any stage in a claim, including claims denied based on a pre-existing condition exclusion. Please contact us at info@MKDisabilityLaweyers.com if you have any questions or to request a free consultation.
The preceding is not intended to be legal advice. This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog, you understand that there is no solicitor client relationship between you and the blog publisher. The blog should not be used as a substitute for competent legal advice from a licensed lawyer in your jurisdiction. If your disability claim has been denied and you require legal advice, contact a lawyer specializing in disability law.