Historically, nasty things happen in the middle of March and this year is no exception. On March 21 and 22, 2013, respectively:
- The Saskatchewan Court of Queen’s Bench hammered American Home Assurance and Zurich Life Insurance with aggregate punitive damages of $4.5 million for bad faith claims handling and aggravated damages of $450,000; and
- Penncorp Life Insurance got hit by the Ontario Superior Court of Justice with aggravated damages of $100,000 and punitive bad faith damages of $200,000.
Possibly worse still for the insurance industry is a November 2012 decision by the Saskatchewan Court of Appeal, which has recognized the possibility of an award of non-punitive damages against insurers who breach their duty of good faith to insureds. What these cases may mean for the industry is that:
- The “ceiling” on punitive damages awards against insurers may have increased many fold; and
- Even in the absence of circumstances warranting a punitive damages award, damages for breach of good faith may now become commonplace.
The plaintiff in Branco v. American Home Assurance Co., 2013 SKQB 98 (Branco) took employment with a Saskatchewan company that operated a minesite in Krygyzstan (where the heck is that, you ask). The American Home Assurance Company (AHAC) provided the minesite workers with benefits coverage based on the Workers Compensation Board benefits payable in Saskatchewan. Zurich Life Insurance Company Limited (Zurich) provided long term disability benefits coverage. In December 1999, a steel plate fell on the plaintiff’s foot and rendered him unable to work. After an unsuccessful surgery on his foot, the plaintiff was determined to be permanently disabled by numerous doctors, many of which the plaintiff saw at the insistence of AHAC.
Among other instances of bad faith, Zurich was found to have delayed in dealing with the plaintiff’s claim and to have made offers to settle the claim at a significant discount despite acknowledging that full coverage did apply. For its part, AHAC was found to have “discontinued payment of benefits in order to create hardship on the Insured to force him into accepting an extremely low offer of settlement”.
In the end, Acton J. found that both AHAC and Zurich breached their duties of good faith to the plaintiff. Of particular importance to this finding were the insurers’ lack of consideration for the overwhelming medical evidence to the effect that the plaintiff was permanently disabled, the deliberate behaviour of the insurers, and the general disregard for the hardship endured by the plaintiff.
In awarding $4.5 million for punitive damages ($1.5 million against AHAC and $3 million against Zurich), Acton J. stressed the need to deter the type of behaviour demonstrated by AHAC and Zurich. Specific reference was made to the $1 million punitive damages awarded in Whiten v. Pilot Insurance (2002) and its apparent insufficiency in forcing insurers to abide by the terms of their policies. Acton J. clearly intended the large punitive damages award as a much more stark warning to insurers:
216 …It is hoped that this award will gain the attention of the insurance industry. The industry must recognize the destruction and devastation their actions cause in failing to honour their contractual policy commitments to the individuals insured.
The award of aggravated damages will very likely be overturned on Appeal. Such damages are supposed to be compensatory, not punitive in nature. The $450,000 award substantially exceeds the amount of general damages that can be collected by a quadriplegic in a personal injury case! (Currently that “cap” is approximately $335,000). The Court seems to have ignored the usually modest nature of “mental distress” damage awards exemplified by the $20,000 awarded by the Supreme Court of Canada in the seminal Fidler v. Sunlife Assurance case (2006).
On the punitive damages front, the Court certainly recited and paid lip service to all of the components that the Supreme Court of Canada required to be considered in Whiten but the 450% increase of the $1 million punitive damages awarded in Whiten may also be overturned on appeal as simply being too much.
Fernandes v. Penncorp Life Insurance Company, 2013 ONSC 1637, also involved a disability insurance claim. Again, the Ontario Court paid lip service to the case law respecting both aggravated damages and punitive damages and had no difficulty in concluding that both were warranted in the circumstances of the case. However, the Court did not actually rationalize the specific quantum awarded, namely $100,000 for aggravated damages and $200,000 for punitive damages. Even so, the amounts are much more modest than the enormous sums awarded in Branco.
In Fernandes the injured bricklayer, a “proud, self-reliant man who had always worked to the fullest extent possible” was denied disability benefits for six years. The Court found he was humiliated and suffered great mental distress. It also made express findings of fact that the claims adjuster was denying coverage and delaying payment in order to take advantage of the insured’s economic vulnerability and to gain bargaining leverage in negotiating a settlement. She took an adversarial approach and did not deal with the claim fairly or in a balanced way. These findings of fact may be difficult to overturn on appeal but again, the manner in which the specific awards were quantified may not withstand critical appellate analysis.
Possibly most disturbing of all in terms of these recent developments is the award made by the Saskatchewan Court of Appeal in Saskatchewan Government Insurance v. Wilson, 2012 SKCA 106. This was a case where the “no-fault benefits” payable by the auto insurer were not actually denied but the insurer had issued a notice to the insured informing her that they would terminate six months into the future. The decision was retracted before the insured suffered any damage as a result of the lawsuit issued by the insured which proceeded to a point where the insurer was compelled to acknowledge, at least internally, that it had no legal or factual foundation for its decision to deny benefits. The Trial Court awarded punitive damages of approximately $15,300 broken down as $7,500 for breach of the duty of good faith and $7,800 as indemnification for the legal fees that the insured had been forced to incur to enforce coverage.
The Saskatchewan Court of Appeal agreed with the trial judge’s analysis of SGI’s “bad faith” handling of the insureds claim. However, it noted that the plaintiff has not even claimed punitive damages in her pleadings and, therefore, an award of punitive damages could not be sustained. Nonetheless, the Court of Appeal concluded:
- While a breach of the duty of good faith typically walks hand-in-hand with a denial of benefits or other breach under the express terms of a contract of insurance, a breach of the implied duty of good faith does give rise to a separate cause of action;
- It can be difficult to separately identify the “damages” which might flow strictly from a breach of the duty of good faith …especially in circumstances which do not merit an award of punitive damages and where the insured avoids any loss or damage resulting from the breach;
- Nonetheless, the $7,800 legal fees represented reasonable “mitigation expenses” incurred by the insured as a result of the insurers breach of the duty of good faith and so
- While not properly characterized as an award of punitive damages, they are collectible as “damages in respect of the breach of the duty of good faith”.
Of course, the amounts in question could perhaps just as easily have been reimbursed as an award of “full solicitor/client costs”, which is a fairly common occurrence in coverage enforcement cases. Still, the conclusion that a breach of the duty of good faith can in and of itself sustain an award of damages arguably increases the exposure of insurers in cases of this sort.
It will be interesting to see whether the Saskatchewan case law represents a sea change in bad faith litigation in Canada. For sure, the stakes now seem to be substantially increased and the insurance industry had best pay attention to these developments.
If you have any questions about this case or any other insurance law matter, please contact any member of Clark Wilson’s Insurance Practice Group.