Bad Faith in Long-term Disability Claims
by David Share and Courtney Mulqueen
Insurers have come to expect to be faced with allegations of bad faith in long term disability claims, but without being confronted with the facts and evidence upon which the success of these claims depend, these allegations are often minimized or overlooked entirely in the litigation.
However, in light of the recent decisions of Fernandes v. Penncorp Life Insurance Co. and Branco v. American Home Assurance Co., insurers will be hard-pressed to ignore or dismiss allegations of bad faith. Although these two cases do not alter the law with respect to the insurer’s duty of good faith, they do serve as a “wake-up call”, prompting insurers to thoroughly consider their conduct and its potential to attract significant aggravated and punitive damage awards—awards which have previously been a rare occurrence in life and disability claims in Canada.
The Courts in Fernandes and Branco expressed their disdain for bad faith conduct in long-term disability claims and demonstrated the Court’s renewed appetite to award aggravated and punitive damages in an effort to denounce bad faith conduct. While not all bad faith conduct attracts punitive and aggravated damages, the Courts in these cases, awarded both. In Branco, the Court 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. In Fernandes, 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. Both cases are expected to be appealed.
In Branco, Mr. Branco was a welder. He was 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, 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. Since both of these cases have been appealed, it remains uncertain whether the decision in Fernandes will be used to dilute the requirement for a degree of bad faith conduct warranting punitive damages.
The decision in Whiten v. Pilot Insurance 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 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.
While the two recent decisions of Branco and Fernandes may serve to heighten the insurance defendants’ sensitivity to issues of bad faith in long-term disability claims and promote 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 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, Branco and Fernandes. 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.
provide 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:
In evaluating the conduct and whether it amounts to bad faith, the Courts in Branco and Fernandes, 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:
While the preceding cases, demonstrate the insurer’s obligation to deal with claims in good faith and consider the plaintiff’s vulnerability, one must not overlook the reciprocal obligation of the insured to advance claims honestly and in good faith.
Andrusiw v. Aetna Life Insurance Company of Canada was the first reported case in which punitive damages were awarded against an insured for a fraudulent disability insurance claim. In Andrusiw, the insurer paid disability benefits for several years, unbeknownst that the plaintiff had returned to work approximately one year after becoming disabled. The Court ordered the plaintiff to repay disability benefits from the date he returned to work and then awarded $20,000 in punitive damages to the insurer. In making the award of punitive damages, the Court reasoned that the insured would not be punished and the objective of deterrence would be negated, if the only consequence of his fraudulent claim was that he forfeited that claim, leaving him no worse off than if he had been truthful in the first instance.
These old and new decisions demonstrate the Court’s continuing disapproval of bad faith conduct of both insurers and insureds in the context of long-term disability claims and the extent to which the Court will go to deter and punish such behavior. They serve to remind insured’s to be honest and avoid fraudulent claims and to remind insurers to consider the vulnerability of the claimant and the consequences of not adjudicating legitimate claims promptly and fairly during the course of the claim and also in the course of the litigation.
While we cannot predict how the appellate courts will deal with these two decisions, counsel representing claimants should continue to scrutinize insurer files for evidence of poor adjudication, with particular attention to the areas outlined earlier in this article. We expect that most insurers will continue to view the conduct in Branco and Fernandes as being rare and not aimed at the standard operating procedures of most Canadian disability insurers. All disability insurers, however, ignore the messages from these two cases at their peril.
- 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.
- 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.