In Fernandes v. Penncorp Life Insurance
Company, [2014 ONCA 615], the Court of Appeal upheld the
Trial Judge's decision awarding $200,000.00 in punitive
damages. The Court of Appeal did, however, reduce the damages for
mental distress from $100,000.00 to $25,000.00. On appeal, the
Defendant Insurer argued that there was no reasonable basis for an
award of punitive damages and that the damages for mental distress
The Plaintiff was a bricklayer. On December 11, 2004, Mr.
Fernandes fell off a scaffold and injured his back. Two days
later, he fell off a trailer and again injured his back.
Following the two accidents, he was unable to work. As a result,
his successful company ceased operating and his employees
departed. At the time of the incidents, he was 40 years
The claim was advanced against his disability carrier, Penncorp
Life Insurance. This policy entitled him to benefits for a
period of two years if he was unable to work at his own occupation
as a result of injuries. Thereinafter, the policy entitled
him to benefits if he was disabled from working at any occupation
for which he was reasonably suited by education, training or
experience. While the insurer paid disability benefits, they were
terminated as of July 21, 2005.
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 the
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 obligations to pay a claim.
Mere denial of a claim that ultimately succeeds is not, in itself,
an act of bad faith.
When these principles were applied, the Court of Appeal noted
that the Trial Judge considered the applicable jurisprudence.
The Trial Judge concluded that in addition to the breach of the
insurance contract to pay disability benefits, the Insurer had also
breached its duty of good faith. The Trial Judge found that
the Insurer had not dealt with the Insured in a fair and balanced
manner. Instead, the Insurer's representative had taken
an adversarial approach to the claim. The Insurer's
representative stopped benefits based on a vacuum of medical
evidence that would support the Insurer's claim. This resulted
in the benefits being terminated contrary to the medical
evidence. Further, the surveillance evidence did not
reasonably support the decision to terminate benefits.
Finally, the Insurer failed to formally advise the Insured of the
termination of benefits until five months after the fact. It
simply ceased sending disability cheques.
With respect to the mental distress damages award, the Insurer
acknowledged that benefits were owing but took issue with the
quantum of same. The Court of Appeal noted that there was no
explanation for how the Trial Judge arrived at his figure of
$100,000.00 or what facts justified such an amount. The award
appeared inordinately high and entirely disproportionate, where the
evidence was that circumstances apart from the appellant's
conduct contributed to the psychological distress. The Court
of Appeal noted that the cases which were cited by the Trial Judge
ranged from $20,000.00 to $25,000.00. Accordingly, the amount
was reduced to $25,000.00.
This case confirms the need for Insurers to ensure that a
decision to terminate benefits is well supported by medical and
other evidence. Further, the Insurer must continue to consider
information as it becomes available to make certain that their
termination is still warranted in light of new documentation. The
failure to do so could expose Insurers to significant punitive
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