Lawsuits that arise from denied Long Term Disability (LTD) claims commonly seek payment of past benefits owing, a declaration that benefits be reinstated, and extracontractual damages for the manner in which the claim was denied and the impact of the denial on the individual.  These extracontractual claims are usually framed as punitive and Aggravated Damages. Although punitive and aggravated damages awards at trial are uncommon, these claims should be pursued when there is evidence of bad faith on the part of the insurer and/or evidence of mental distress on the part of the insured. 

What Are Punitive Damages?

Punitive damages are reserved for exceptional cases to address retribution, deterrence, and denunciation. The intent is to punish, not to compensate. 

The leading Canadian authority on punitive damages in the insurance context is the Supreme Court of Canada’s decision in Whiten v. Pilot Insurance Co., 2002 SCC 18.  Although this is not a Long Term Disability case, the general principles are the same.   

The Supreme Court was careful to state that there must be more than just a breach of contract, such as the refusal to pay benefits. There must be an independent actionable wrong. An insurance policy is a special type of contract that requires both sides to act with the utmost good faith, and the breach of this duty is sufficient to meet this first requirement. The insurer must act in good faith at every step of the claim, including the initial investigation and the decision whether to pay the claim.  It must also assess the merits in a balanced and reasonable way, and it cannot deny or delay payment in order to take advantage of economic vulnerability or to gain a bargaining advantage. Failure to do so is breach of the duty of good faith. But not every breach will result in punitive damages. Rather, it must be established that the insurer markedly departed from ordinary standards of decency. This means the conduct must be malicious, oppressive, or high-handed, and offend the court’s sense of decency.  

What Are Aggravated Damages?

Aggravated damages are not the same as punitive damages. They are intended to compensate for the consequences of the breach of contract, not to punish. An independent actionable wrong; that is, bad faith, is not required for the court to award aggravated damages. 

In a denied Long Term Disability claim, the refusal to pay benefits may result in mental distress and financial hardship.  Aggravated damages are available as additional compensation, beyond payment of the benefits owing, if it is established that the breach of the contract caused the harm. 

Canadian courts have awarded aggravated damages far more often than punitive damages, but the quantum of the awards are typically much less than punitive damages. 

Punitive and Aggravated Damages in LTD Claims

There are relatively few cases that have resulted in judgments for punitive or aggravated damages against Long Term Disability insurers in Canada. 

Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30 is the leading authority for punitive and aggravated damages in the context of Long Term Disability claims.  In this case, the plaintiff suffered from chronic fatigue syndrome and fibromyalgia. The LTD claim was approved and paid for six years.  Sun Life then terminated payment of benefits based on surveillance, despite strong medical evidence that the insured could not return to work. 

The $20,000 awarded at trial for aggravated damages was upheld at the Supreme Court of Canada, wherein it was noted disability insurance contracts are created to protect individuals from financial and emotional insecurity, and a delay or denial of such protection may cause acute mental distress.  Punitive damages were not awarded in this case. The court held that punitive damages should only be awarded exceptionally and only in clear cases of bad faith.  

Although the Supreme Court maintained a high threshold for punitive damages, it confirmed that bad faith is not required to award aggravated damages for mental distress when there is a breach of a Long Term Disability policy. 

Fernandes v. Penncorp Life Insurance Company, 2014 ONCA 615, is another important decision from the Ontario Court of Appeal. Again, benefits were stopped based on surveillance even though the medical evidence supported disability. The insurer was required to pay $25,000 aggravated damages for mental distress, and $200,000 for punitive damages.  

The Court of Appeal echoed prior decisions regarding the limited circumstances in which punitive damages will be awarded, but found they were appropriate here where the insurer’s conduct included: 

• Failing to deal with the insured in a fair and balanced manner;
• Taking an adversarial approach to the claim;
• A lack of medical evidence to support termination;
• Relying on surveillance that was inadequate to support denial; and,
• Failing to advise the insured of the denial, but instead simply stopping payments without notice. 

The highest punitive damages ever awarded in Canada were in Zurich Life Insurance Company Limited v. Branco, 2015 SKCA 71.  The plaintiff brought the claim against two insurers.  The trial judge awarded $3,000,000 in punitive damages against Zurich, because it tried to take advantage of the insured’s economic vulnerability and did not administer the claim in good faith. The judge also awarded $300,000 for mental distress.  There were additional awards of $1,500,000 and $150,000 against a second insurer, AIG.  

Clearly the trial judge was outraged, but the Court of Appeal reduced the punitive damages awards to $175,000 and $500,000.  It also reduced the mental distress awards to $15,000 and $30,000. Even after the reductions, these remain the highest punitive damages awards ever awarded in Canada for Long Term Disability claims.  

The last two decisions of note are both recent cases against Desjardins.  The first is Godwin v. Desjardins Financial Security Investments Inc., 2018 BCSC 99.  The judge concluded that Desjardins failed to assess the plaintiff’s claim in a fair and balanced manner, and that those failures went beyond mere errors of judgement or misunderstanding. The claims examiner repeatedly failed to analyse and weigh evidence, misapplied the test of disability, and made conclusions that were not supported by the evidence. This amounted to a lack of good faith. A relatively modest $30,000 was awarded for punitive damages, in addition to $30,000 for mental distress. 

The second recent case is Greig v. Desjardins Financial Security Life Assurance Company, 2019 BCSC 1758.  The judge noted similarities between Desjardins’ conduct in this case and what occurred in Goodwin. This was not the first time this particular LTD insurer was found to have acted in bad faith for similar conduct, and successive transgressions resulted in a higher award.  $200,000 for punitive damages was awarded, in addition to $50,000 for aggravated damages for mental distress.  

Conclusion

Being disabled from employment and having a Long Term Disability claim improperly denied adds insult to injury.  The courts recognize that LTD insurers sometimes need to be punished, and in some cases insureds ought to be compensated for mental distress.  

Where there is evidence of bad faith, Long Term Disability lawyers will advance claims for punitive damages. When there has been financial or mental distress as a result of the denial, aggravated damages are claimed.  When these claims are properly advanced, the insurer is forced to reconsider the denial, which often leads to a fair settlement.

Contact Michael Jordan, Long Term Disability lawyer, for a free assessment of your claim.  Michael has offices in Toronto, Ottawa, and London, and represents clients across all of Ontario.

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