Canada: Punitive Damages, and Insurer Conduct – The Court of Appeal Upholds a $200,000.00 Award

Last Updated: October 3 2014
Article by Laura Emmett

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 were excessive.

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 old.

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 Court of Appeal recognized that the Insurer disputing or refusing a meritorious claim did not, in itself, constitute a breach of the duty of good faith.  The Court of Appeal cited the decision in 702535 Ontario Inc. v. Lloyd's of London, Non-Marine Underwriters [2000 CanLII 5684] which described the parameters of an Insurer's duty 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 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 damages.

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Laura Emmett
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