The Right to be Wrong

As noted in the Ontario decision, the incorrect denial of a claim will not necessarily lead to a finding of a breach of the duty of good faith: ¹

The duty of good faith also requires an insurer to deal with its insured’s claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or to gain bargaining leverage in negotiating a settlement. A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy. This duty of fairness, however, does not require that an insurer necessarily be correct in making a decision to dispute its obligation to pay a claim. Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.

The test will be:

whether the denial was the result of the overwhelmingly inadequate handling of the claim, or the introduction of improper considerations into the claims process

This was pre-Fidler and cited with approval in this decision.

Following Fidler, although there are exceptions, the awards for mental suffering tend to cluster in the range of $25,000 to $35,000. The notable distinction is the award of $90,000 allowed by the Nova Scotia Court of Appeal. ²

A decision of the Ontario Superior Court ³soon followed in early 2007, allowing the sum of $30,000 due to the incremental mental suffering caused by the insurer’s default. The plaintiff sought to obtain a higher sum to include damages suffered due to the requirement to cash his RRSP and the sale of his home, both of which were denied. The trend to award such incremental damages for economic loss as was previously allowed ⁴remains very much in doubt.

In a 2007 decision of the Newfoundland & Labrador Supreme Court involved a plaintiff suffering from depression and anxiety requiring medical treatment and ongoing drug therapy due to the insurer’s default. ⁵ The sum of $25,000 was awarded.

In a Manitoba case, the trial judge awarded the sum of $45,000 based upon the unfair denials of the claim and the impact this had upon the plaintiff’s personal life.

The Manitoba Court of Appeal examined case law prior to Fidler which had expressed the sentiment that mental distress damages, when awarded, should be “modest” and determined that such was no longer an appropriate rule post Fidler. The award should be “sensible and realistic”. In addition, this court stated that the trial judge's damage assessment should be given "significant judicial discretion". Notwithstanding these words, the Court of Appeal reduce the trial award of $45,000 to $25,000.

Mr. Justice Hambly ⁶ in the March 2013 of the Ontario Superior Court awarded the sum of $100,000 for aggravated damages and $200,000 for punitive damages.

The plaintiff fell from a scaffolding from a height of eight feet in December of 2004. Two days later he returned to work and again fell from a distance of three feet. His company then ceased operations and his employees found work elsewhere.

The insurer failed to pay the plaintiff for six years from August 2005 to September 2011. On the latter date, the insurer conceded that he was entitled to two years of own occupation benefits.

The trial judge found that the failure of the insurer to pay the own occupation sums on a timely basis and the any occupation benefits at any time humiliated the plaintiff and made him financially dependent on his common law spouse.

The trial judge also found that there was never any doubt on the information provided that the insured was totally disabled from performing any of the important daily duties pertaining to his occupation of brick layer, and such denials had been effected in bad faith. It was also concluded that the company had ignored the detailed job description of the plaintiff when benefits were declined.

There was no professional medical evidence offered as to the impact of the breach upon the plaintiff’s life. As noted, the sum of $100,000 was awarded for aggravated damages and $200,000 for punitive damages. In addition, full indemnity costs of $212,130 were granted.

On appeal the award of punitive damages was upheld. The insurer also argued on appeal, that while it admitted liability for the mental distress award, the sum ordered was excessive. The appellate court noted that the test for such a damage review on appeal required the application of an error in law or that the award was inordinately low or high.

The Court of Appeal concluded that there was not a detailed rationale given by the trial judge to support the award of $100,000 for mental distress, noting further that the insured requested an award of $25,000 at trial. The award was reduced to $25,000. ⁷

Punitive damage awards have taken on a new life on this subject. Awards of $200,000,⁸ $500,000 ⁹ and $175,000 ¹⁰have been made recently, these both being set in two appellate decisions. The Ontario Court of Appeal in late 2023 upheld a jury award of $1.5 million in punitive damages. ¹¹

The 2013 decision of Queen’s Bench of Saskatchewan ¹² set the short-lived high water mark in punitive damages by awarding $3,000,000 against Zurich and $1,500,000 against American Home Assurance Company. In addition, awards of aggravated damages in the sums of $300,000 and $150,000 were made against Zurich and American Home Assurance respectively.

On appeal, the punitive damage awards were reduced to $500,000 and $175,000 respectively, nonetheless which remained formidable sums. The mental distress sums were also reduced to $30,000 and $15,000.

The Court of Appeal saw numerous errors in fact and law in the trial decision. It did however make the following findings of wrongdoing to support liability in punitive and mental distress awards, firstly against AIG:

1. It suspended benefits due to the delay in receiving its medical report from its own expert.
2. Upon its physician and the plaintiff’s doctor approving benefits, it still failed to authorize payment for 18 months.
3. In February of 2003, when AIG’s internal adjuster approved benefits through to December 2002, it failed to pay this sum until April of 2003.
4. The attempt made by AIG to pressure the plaintiff to accept a “low-ball” settlement sum.

In the determination of a fair punitive damage amount, the factors considered by the court were proportional in relationship to:

1. The level of blameworthiness in the questioned conduct;
2. The vulnerability of the plaintiff;
3. Was the plaintiff a direct target or a parenthetical figure;
4. The need for deterrence;
5. Whether the wrongdoer has suffered other punishment such as a criminal conviction or other civil form of punishment; and
6. Is the sum awarded to be considered by the defendant in a cavalier manner to be a mere licence fee.

The Court of Appeal held that the wrongdoing of Zurich was worthy of a punitive damage claim because of the following conduct:

1. After it approved the claim, instead of paying the sum admittedly owing, it made a settlement offer of that sum, less fees it was required to pay to the plaintiff of $9,000 on a contested motion as to jurisdiction, for which it requested a release;
2. The approval of benefits for the “own occupation” period of two years in 2002 were not communicated to the Plaintiff until 2007, and were not paid until 2009 ;
3. The defence in the action denied that it owed such benefits, when it knew that to be untrue;
4. The company’s legal department withheld medical reports from its own claims department for years.

As to sum for mental distress damages, the Court of Appeal referenced the cap of personal injury damage awards, which then stood at $350,000, noting that the trial decision exceeded such sum and that the plea at trial was for a total sum of $100,000 roughly. For these reasons, the total award was set at $45,000, $15,000 of which was attributed to AIG. Such reference to the personal injury awards is not common place, although does make logical sense. ¹³

The Ontario Court of Appeal in December of 2023 upheld a jury award of $1.5 million in punitive damages against Sun Life in a claim for unfair treatment of an applicant seeking disability benefits. ¹⁴ At trial before a jury, the plaintiff was awarded lost disability benefits of $220,000, aggravated damages of $40,000 and full costs of the 22 day trial of approximately $1 million. ¹⁵ She also was awarded a declaration that she, at trial, was totally disabled as such term was defined in the policy.

The issue on appeal was the award of punitive damages. Blue Cross also sought leave to appeal, as is required, on the issue of costs alone. Both appeals were dismissed.

The case arose through a group disability policy provided through the plaintiff’s employment with Compass Group Canada which provided her services to Humber River Hospital.

The plaintiff had suffered a stroke at age 38, while she was exercising in October of 2013. She was paid short term disability benefits until January 2014. She was denied then denied these benefits, a decision which she successfully appealed internally. She was then allowed benefits to March 7, 2014 for a total short term period of 30 weeks.

She then applied for long-term disability. The policy contained the usual “own occupation” test for 2 years and subsequently “any occupation” test. The plaintiff received the first two years without issue. Following the 2 year threshold, she was denied the “any occupation” benefits. She appealed, internally again, the denial of these benefits at two such internal levels. She then sued.

The essential submission of Blue Cross was that it acted in good faith when it denied the claim and that “it has a right to be wrong”. The issue on this question centered on the factual foundation of the award, as found by the jury, that was wrong and that it had committed a good faith error. The Court of Appeal also noted that Blue Cross failed to call as witnesses all but one of the persons considering the internal appeals on the denial of benefits.

The record, the appellate court, was replete with evidence to support the award of punitive damages. ¹⁶ These included:

1. Blue Cross relied upon medical opinions from general practitioners which it knew or ought to have known that they were incorrect;

2. It selectively chose evidence to support the denial and ignored contrary medical evidence. One such detail was that a report from a Dr. Knox, an external reviewer, which stated “I don’t believe she can return to work at this time, even on a part-time basis”. This statement was omitted from the review;

3. The insurer sought an independent medical examination for the first time two and one-half years after the stroke;

4. Having received this report, it distorted its conclusion to support the denial decision;

5. It “persisted in distorting Dr. Kane’s and Ms. Kresak’s reports even when counsel for the plaintiff drew these errors to its attention. ¹⁷

The Court of Appeal saw such evidence supportive of the bad faith conduct of Blue Cross:

Overall, we see repeated instances of the Blue Cross team ignoring information, misinterpreting experts’ reports, and relying on the ill-informed advice of their contracted doctors to deny benefits. In effect, they created a closed loop of information that ignored contrary information and created a counter-narrative based on their misinterpretation of the relevant data. This is a pattern of misconduct that, at best, shows reckless indifference to its duty to consider the respondent’s claim in good faith and conduct a good faith investigation, and at worst, demonstrates a deliberate strategy to wrongfully deny her benefits, regardless of the evidence that demonstrated an entitlement.

[31]      These examples or any combination offer a sufficient basis to award punitive damages. Jurors could have concluded that Blue Cross was not just cavalier in treating the respondent’s claim but that it undertook a deliberate strategy to wrongfully deny her the benefits she was entitled to under the policy. The fact that Blue Cross failed to call the critical witnesses to provide the context about their handling of the file could further serve to support a finding that the conduct was deliberate.

As to the quantum awarded, the court also observed that there was ample evidence to show that such conduct was systemic within the company, which added reinforcement for the award.

On the issue of costs, the Court of Appeal agreed that there should not be a general rule that full costs should follow a successful disability award. It did grant leave on this as a discrete issue; however, it then determined that full costs should be allowed, given the conduct of the insurer and allowed this in the sum as awarded.

The Nova Scotia Court of Appeal in a November 2015 decision ¹⁸ upheld, yet reduced in quantum, the trial decision. Leave application dismissed. ¹⁹ in which awards of both mental distress and aggravated damages were made.

The issues in dispute between the parties were:

1. Rehabilitation services;
2. The tax treatment of the benefits; and
3. The reduction of benefits due to third party payments which had been made to Brine.

The plaintiff had received retroactive lump sum payments from CPP and his Public Service Superannuation. The insurer had asserted an immediate offsetting claim for the sum received of roughly $100,000 and chose to cease all regular benefits until the over payment had been effected.

To this point, the trial judge had ruled the overpaid sum be pro-rated monthly.

The plaintiff had declared bankruptcy. At such time the outstanding sum due to the insurer was an over payment of $62,000. The insurer offset this debt against benefits during the bankruptcy. Following his discharge from bankruptcy, the insurer continued the offset and alleged the debt arose due to fraud and hence the offset survived the discharge.

To support this position, it also sued the insured post-discharge based on such allegation of fraud to allow for the over payment set-off. At trial it abandoned this allegation, although it did assert that it was initially reasonable to make the assertion.

The Court of Appeal agreed with the trial judge on this issue, namely, that the offset should have been effected on a pro-rata basis, given the construction of the “Temporary Reductions” provision.

Further the pre-bankruptcy debt was clearly extinguished by the discharge and the insurer had no right to assert such offsets as it had done. The sum unlawfully withheld was determined to be $78,000.

As to the other alleged wrongdoings, the trial judge found that the company unfairly discontinued rehabilitation services, failed to provide its expert report until the week prior to trial, 10 years later, and issued T4 slips even after it had received a Tax Court ruling to the contrary.

Of these issues, the most complex was that involving the decision to cease the rehabilitation services.

The policy did not mandate the provision of such services, but the company did provide such in view of the young age of the insured and the possibility that he may never work again.

Thirty months after the services had been provided, the insurer elected to terminate them, following receipt of its IME. The trial judge was critical of the manner of this decision being made, which was contrary to the view of its IME.

The issue on appeal was: how could the insurer be determined to have acted in bad faith upon terminating a benefit that it was not contractually obliged to provide?

Interestingly the Court of Appeal referenced the Supreme Court of Canada decision in Bhasin to determine that it was not necessary to find a specific contractual term which had been violated, but rather the court could look to the “independent implied contractual obligations”:

Bhasin’s broad organizing principle and its outgrowth duties do not just tack an extra sanction onto the breach of an explicit contractual term. Neither are the duties of honest dealing in Bhasin, or good faith in the insurance context, just executive summaries of the contract’s written terms. They are independent implied contractual obligations that derive from the existence of the contract. Whether National Life breached its duty of good faith is not predicated on the condition precedent that National Life breached an explicit provision of the Policy.

Awards at trial were made of $150,000 for aggravated damages, $30,000 for mental distress and $500,000 for punitive damages.

The Court of Appeal in assessing the test for mental distress damages for unfair dealing in a peace of mind contract found:

1. The failure to pro-rate the repayment obligation was not “fair and reasonable”;
2. The decision to cease the rehabilitation services disregarded the medical evidence and further based on the plaintiff’s successful CPP application, the latter without asking the plaintiff for his views;
3. The failure to provide the plaintiff with its expert report until the week prior to trial, 10 years after its creation, to the prejudice of the plaintiff.
4. The continued production of T-4 slips following receipt of a tax ruling that the benefits payments were not taxable.

The Court of Appeal noted that the trial judge incorrectly made awards of mental distress damages and aggravated damages. The damage claim against the insurer, the court held, was based on the implied contractual duty of good faith which permitted but one claim. To this end, the collective total of aggravated and mental distress damages of $180,000 was considered excessive and reduced to $90,000.

As to the award of punitive damages, the Court of Appeal agreed to the need for such an award, given:

1. The conduct of the defence, particularly the evidence of the company representative and her “wanton disregard for the accuracy of her trial testimony in the face of” contrary documents;
2. The T-4 issue;
3. The delay in providing its expert report; and
4. The rehabilitation services.

The appellate court, however, noted that in the assessment of the quantum, regard should be had to the fact that the insurer did not profit from its conduct, which the trial judge did not consider. In addition, the trial judge failed to assess whether the total award of compensatory and punitive damages was inordinate. The plaintiff’s vulnerability, this court noted, had impacted the mental distress awards.

The award was reduced from $500,000 to $60,000.

The sums of punitive damages as allowed by the Saskatchewan Court of Appeal in Branco of $500,000 and $175,000 remain unique. ²⁰ Likely it will be the rare case in which such an award will be made. The sum as awarded by Nova Scotia Court of Appeal is within the expected range.

The arbitral decision of Arbitrator Daniel Harris ²¹ a decision made in October of 2009 reviewed the employer’s liability for moral and punitive damages when it had chosen to and followed the advice of an ASO.

The Hospital’s evidence was that STD is decided by it, upon the recommendation of the ASO provider, Cowan, as was the return to work issue.

The arbitrator found that Cowan did not deal with the STD application in good faith, due apparently to prior medical issues and absences and that he delayed the adjudication of the STD claim as it was attempting to shift liability to the LTD carrier as being a reoccurrence of the earlier disability. He also found that Cowan interrupted the return to work plan which had been set for February 15, 2006.

On these facts, the arbitrator found that the employer and Cowan “walked lock-step” and the employer exercised no independent discretion, as was its obligation. The employer was aware of “Cowan’s malicious and unsupported accusations and the Hospital was content to ride along with Cowan’s behaviour. I find it adopted Cowan’s actions and assessments”.

An order was made that the employer compensate the grievor for her emotional suffering and for punitive damages. ²²

The Queen’s Bench of Saskatchewan confirmed in its 2010 decision ²³ that the insurer had an obligation to conduct a reasonable and fair investigation of the claim. This was upheld in substance although set aside the award of the punitive damages of $7,500. ²⁴as this had not been pleaded and allowed the legal costs as a breach of the duty of good faith.

The concept that the insurer has a duty to its insured was also reviewed by Mason J. of the Alberta Queen’s Bench. ²⁵ The court spoke to the sentiment that where the insurer is asked to pay its own insured, there rests upon the insurer a duty to act quickly and in good faith.

The Ontario Court of Appeal came to the same conclusion in its 2003 decision ²⁶ namely, that the insurer must act with the utmost good faith at every step of the claims process. O’Connor J.A. also affirmed that the insurer must assess the merits of the claim fairly and in an even-handed manner. ²⁷

The Ontario Court of Appeal upheld a trial judge's award of $60,000 in moral damages due to the unfair denial of a six month short term disability application. This sum was in addition to the award of $25,000 for sexual harassment and the 10 month notice award. The latter two sums were not appealed. The crux of the unsuccessful appeal was to reduce the aggravated award and to argue that this sum awarded was double recovery. ²⁸

These awards of mental distress and punitive awards, particularly following Fidler in 2007 have very much changed the judicial landscape in favour of fair and prompt administration of disability claims which are clearly a necessity for economic survival when called upon.

A summary of similar awards of aggravated and punitive damage awards against an insurer for bad faith conduct in the claims process is found here.