BCCA Addresses Insurer Bad Faith (sort of)

In Asselstine v. Manulife Insurance it was hoped the B.C. Court of Appeal would provide a detailed analysis of the type of conduct on the part of a disability insurer which would amount to the sort of bad faith which would warrant punitive damages. Unfortunately, the Court avoided that exercise but the judgment nonetheless addresses matters which will be of great interest to insurers and administrators dealing with these sorts of claims.

Background

Asselstine was a registered nurse who was diagnosed with multiple sclerosis. After an initial six-week sick leave, she returned to work at the recommendation of her treating specialist. Her employment was then terminated for reasons unrelated to her medical condition. Some weeks later she took a position as a doctor’s receptionist and worked full-time for approximately three months, by which time her health had deteriorated to such a point that she was unable to work any more. By this later date, she was under the treatment of another neurologist who later expressed the view that she should never have returned to work at all and had been effectively totally disabled throughout.

The employer was the holder of a long term disability plan for the benefit of its employees. The plan was fully funded by employee contributions. Eligibility requirements included that:

1. the “total disability” start during employment, and
    
2. in the next twelve months, there had to be a qualifying period of at least six months continuous “total disability”.

The plan, including claims adjudication, was administered by Manulife pursuant to an “ASO” contract (administrative services only). Asselstine first made application for disability benefits some nine months after termination of her first employment. The Manulife adjudicator therefore had to make a retrospective determination whether Asselstine had been “totally disabled” both while she was working with her first employer and for the continuous period of at least six months (which would have included part of her subsequent employment as well). The adjudicator was confronted with the fact that Asselstine had actually worked during this period of time and was also confronted with conflicting medical opinions regarding her ability to work during the relevant time periods. The adjudicator ultimately relied on the first treating neurologist’s opinion that Asselstine was not totally disabled before termination of her employment and therefore the claim for benefits was denied.

Asselstine sued both the employer and Manulife seeking payment of benefits and also punitive/aggravated damages for bad faith. Manulife retained the same counsel to represent both the employer and Manulife. In conducting that joint defense, neither the pleadings nor the evidence/argument at trial was specifically directed to distinguishing the roles of the employer and the plan administrator and how that might impact on the liability of either for aggravated/punitive damages.

The trial judge was very critical of the adjudicator’s handling of the claim holding that the adjudicator’s “steadfast” refusal to consider the later conflicting medical evidence was “unfair and inappropriate” and that the adjudicator had failed to apply the “correct legal tests for total disability” when she took into account the later employment as a doctor’s receptionist. The trial judge held that there had been a “clear failure to assess Asselstine’s claim in a balanced and reasonable manner and a failure to act fairly in dealing with it”. Aggravated damages of $35,000.00 were awarded along with punitive damages of $150,000.00. The trial judgment drew no distinction between the respective roles of Manulife and the employer and liability for the damages was effectively imposed jointly on both parties.

The Appeal

Trial counsel did not handle the appeal. On appeal, the primary submissions were that:

• As a plan holder, the employer was not an insurer and was not subject to any obligation of good faith claims handling which could found any award of punitive damages;
   

• Manulife was also not an insurer in this instance, but rather was merely a claims administrator with whom Asselstine had no contract and against whom Asselstine therefore had no cause of action at all;
   

• The assessment of the Manulife adjudicator was an exercise of judgment in no way motivated by malice or an intent to be in any way unfair. Rather if her determination of ineligibility was ultimately incorrect (notwithstanding conflicting medical opinion) this did not amount to bad faith;
   

• In any event, even if the adjudication did reflect bad faith, it was not the sort of egregious misconduct necessary to warrant punitive damages, according to the proper legal tests applicable to such damage awards; and
   

• The awards of both aggravated and punitive damages were too high in the circumstances.

The outcome was a mixed and split decision as follows:

• Asselstine’s entitlement to benefits was affirmed (unanimous);
   

• judgment against Manulife was reversed in its entirety (unanimous);
   

• The appeal respecting quantum of aggravated damages was dismissed (unanimous); and
   

• The appeal respecting quantum of punitive damages was dismissed (2:1).

The majority judgment regarding bad faith essentially just summarized and ultimately deferred to the trial judge’s findings and undertook no analysis whatever of the appellant submissions why the adjudicator’s conduct in the case could not amount to bad faith. While the majority agreed there was no proper cause of action against Manulife, they also held that the issue had not been properly raised at trial and therefore the employer could not now seek to escape liability for the damage awards.

The minority judgment, written by Justice Lowry, contains a number of observations which will be of interest to disability plan holders and ASO administrators alike. The highlights of his opinion include:

• Manulife was not a party to any contract with Asselstine. Hence Asselstine had no cause of action against the ASO administrator and the claim for damages against it must be dismissed;
   

• There was “some force” to the argument that the conduct of the Manulife adjudicator did not amount to bad faith but it was not necessary to address the issue in order to dispose of the appeal;
   

• It is not every breach of good faith that gives rise to an award of punitive damages. There is a two-step process. First, it is “necessary to consider whether the insurer has been delinquent or has conducted the assessment of a claim in a manner that was unfair to insured”. If so this will amount to a breach of the implied obligation of good faith. Next, “it is then necessary to consider whether the insurer’s conduct is so egregious that an award of punitive damages is warranted”;
   

• Because of the way the case was pleaded and tried, the employer could not now argue on appeal that it owed no obligation to exercise good faith simply because it facilitated the plan and took no part in its administration;
   

• Assuming bad faith existed, there was nonetheless no basis on which an award of punitive damages against the employer was warranted.
   

• The trial judges rationale for awarding punitive damages pertained entirely to the conduct of Manulife. There is no legal basis upon which a principal such as the employer can be burdened with an award of punitive damages for the conduct of its agent. Punitive damages cannot be awarded against a principal on a purely vicarious basis. Some measure of blameworthiness on the part of the principal/employer is also essential, and there was no such misconduct by the employer in this case.

Residual Issues and Lessons Learned

One of the sub-texts in the Asselstine appeal was whether bad faith is a tort, and if so, whether an administrator such as Manulife can have liability to a claimant even though there is no direct contractual link between the two. While the point was argued in the Asselstine appeal, there was no direct ruling on the issue. It is perhaps implicit in the unanimous decision to overturn the judgment against Manulife that liability in tort does not in fact exist. Authority in the appeal courts of Canada on this point is very sparse and is yet to be fully developed.

In coverage litigation where both the plan holder and the ASO administrator are named as defendants, consideration should be given to the desirability of separate legal counsel and the possibility of striking out the claim in its entirety against the administrator.

It is noteworthy that the majority in the Asselstine case did not expressly disagree with the dissenting opinion regarding liability of a principal/employer for the conduct of its agent/employee. The majority merely said that it was not open to argue the point on appeal because of the way the matters had been presented at trial. Hence, in future cases it will be open to plan holders to invoke the dissenting opinion to argue that they have no vicarious exposure to punitive damages for the conduct of the plan administrator.

The Asselstine decision can be accessed at:
http://www.courts.gov.bc.ca/jdb-txt/ca/
05/02/2005bcca0292.htm

Readers with questions about the decision or issues respecting bad faith claims generally are invited to contact Nigel Kent at npk@cwilson.com (e-mail) or 604-643-3135 (direct dial).