Clark Wilson LLP Insurance Bulletin
Case Law Review Archive
SCC Overturns Bad Faith Punitive Damage Award
On June 29, 2006, the Supreme Court of Canada issued its judgment in Fidler v. Sun Life Assurance Co. of Canada and possibly put the brakes on the acceleration of punitive damage awards against insurers for so-called bad faith denials of coverage.
Ms. Fidler was a bank receptionist covered by a group LTD policy. She developed chronic fatigue syndrome and fibromyalgia and received LTD benefits for six years. Video surveillance at that time then detailed a number of activities which the insurer considered inconsistent with Ms. Fidler’s inability to perform light or sedentary work. There was medical evidence that she was not yet capable of doing any work but the insurer relied on its own consultants and experts to maintain a denial of benefits.
Ms. Fidler eventually started a lawsuit to enforce coverage. In addition to the claim for arrears of benefits, she also claimed aggravated damages for mental distress and punitive damages on the basis that the insurer had acted in bad faith.
Shortly before the trial began, the insurer reversed its denial of coverage and paid Ms. Fidler all of the arrears. The trial therefore proceeded on the question of whether an award of aggravated damages for mental distress was appropriate and whether punitive damages were also warranted.
The trial judge awarded her $20,000 in aggravated damages but held that although the insurer took a “zealous approach” to denying coverage despite strong medical evidence of continued disability, its conduct ought not be characterized as an act of bad faith in the circumstances.
The British Columbia Court of Appeal reversed the trial judge’s decision on the question of bad faith and awarded punitive damages of $100,000. It noted there was an absence of medical evidence to justify a denial of benefits, the surveillance results were exaggerated and that the insurer’s refusal to disclose the surveillance video to Ms. Fidler was unacceptable. It also characterized the insurer’s pre-trial concession of disability entitlement as “the civil equivalent of a guilty plea”.
On appeal, the Supreme Court of Canada affirmed the award of aggravated damages in the amount of $20,000 but overturned the punitive damage award on the basis that there was no justification for interfering with the trial judge’s conclusion that the insurer’s conduct did not amount to bad faith.
Much of the judgment is devoted to an analysis of the recoverability of mental distress damages in breach of contract cases. For most insurers, this is a discussion of academic interest only. Most would concede, and indeed the Supreme Court of Canada has now expressly affirmed that a disability insurance contract is one where it is reasonable for the parties to contemplate at the outset that mental distress might be consequent upon breach:
“The intangible benefit provided by such a contract is the prospect of continued financial security when a person’s disability makes working, and therefore receiving an income, no longer possible. If benefits are unfairly denied, it may not be possible to meet ordinary living expenses. This financial pressure, on top of the loss of work and the existence of a disability, is likely to heighten an insured’s anxiety and stress. Moreover, once disabled, an insured faces the difficulty of finding an economic substitute for the loss of income caused by the denial of benefits. . . . . People enter into disability insurance contracts to protect themselves from this very financial and emotional stress and insecurity. An unwarranted delay in receiving this protection can be extremely stressful.”
In the circumstances of the case, the Court had little difficulty in concluding that Ms. Fidler’s mental distress was of a degree sufficient to warrant compensation and that the award of $20,000 in that regard should not be disturbed.
Perhaps of much greater interest to the insurance industry will be the Supreme Court of Canada’s observations respecting an insurer’s duty of good faith and the sort of conduct required to attract an award of punitive damages. The court observed:
Punitive damages are designed to address the purpose of retribution, deterrence and denunciation;
By their nature, contract breaches will sometimes give rise to censure. But to attract punitive damages, the impugned conduct must depart markedly from ordinary standards of decency – the exceptional case that can be described as malicious, oppressive or high-handed and that offends the court’s sense of decency;
The misconduct must be of a nature as to take it beyond the usual opprobrium that surrounds breaking a contract;
It is important that punitive damages be resorted to only in exceptional cases, and with restraint;
The proper characterization of an insurer’s conduct on the “good faith” issue requires a careful consideration of the evidence.
In a passage which will undoubtedly be repeated in almost all future cases dealing with bad faith, the Supreme Court of Canada expressly affirmed that the legal standard to which insurers are held is correctly described as follows:
“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 an 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 Court agreed that the facts in the Fidler case represented conduct that was “extremely troubling [and that] the five year denial by the insurer of disability benefits without medical support for the denial is, to say the least, inappropriate”. However it emphasized that “an insurer will not necessarily be in breach of the duty of good faith by incorrectly denying a claim that is eventually conceded, or judicially determined, to be legitimate.” In that regard, the Court disagreed that a concession of entitlement should be construed as a “guilty plea” and emphasized that “the question instead is whether the denial was the result of the overwhelmingly inadequate handling of the claim, or the introduction of improper considerations into the claims process.”
In the end, the Court emphasized that each case revolves around its own unique set of facts. Here, the trial judge had undertaken a very thorough review of the relevant evidence and had considered every salient aspect of how the claim had been handled. While the insurer’s conduct was troubling, it was not sufficiently so as to justify interfering with the trial judge’s conclusion that it did not amount to bad faith in the circumstances. Absent bad faith, there was no basis for a punitive damage award and the appeal was allowed.
This case is important to the insurance industry because it emphasizes that punitive damages for bad faith are available only in exceptional cases and that the court must exercise restraint in that regard. It is only where there is overwhelmingly inadequate handling of the claim or the introduction of improper considerations into the claims process where a conclusion of bad faith might be warranted.
The Reasons for Judgment in Fidler v. Sun Life Assurance Co. of Canada can be accessed at http://scc.lexum.umontreal
.ca/en/2006/2006scc30/2006scc30.html.
If you have any questions about the decision or any other insurance matter,
please contact Nigel Kent
(tel: 604.643.3135 email: npk@cwilson.com), or any other member of the Clark Wilson LLP Insurance Practice Group.
