PART I: THE NSCA DECISION IN BRINE
"Disability insurance is a peace of mind contract": that's the opening line of the Nova Scotia Court of Appeal's long-awaited decision in Industrial Alliance Insurance and Financial Services Inc v Brine1. The Court of Appeal agreed with the trial judge that the Insurer had committed several breaches of its duty of good faith, but drastically decreased the amounts of damages for mental distress and punitive damages (see our previous client update on the trial decision).
The Insured had begun receiving benefits under his employer's long-term disability policy in 1995 after a diagnosis of depression. The Insurer brought an action claiming (in part) an overpayment, as a result of the Insured receiving certain retroactive disability pension benefits. The Court of Appeal agreed with the trial judge that the Insurer breached the Policy when it clawed back the overpayment instead of pro-rating it in accordance with the Policy wording.
In addition, the Court of Appeal agreed the Insurer breached its duty of good faith in the way it handled the Insured's LTD claim. It had disregarded a Tax Court ruling that the LTD benefits were non-taxable, and failed to disclose an IME.
More importantly, the Court of Appeal agreed with the trial judge's findings that the Insurer had improperly discontinued rehabilitation services. The Insurer had disregarded medical evidence that rehabilitation could help the Insured return to work, and assumed that because he had qualified for CPP disability benefits he would never return to work. This was bad faith even though the Policy did not require the Insurer to provide rehabilitation. Once the Insurer decided to provide these services it had to continue them, and communicate about them, in good faith.
Damages for mental distress: Reduced from $180,000 to $90,0002
The Court of Appeal reviewed damages awards across Canada and noted $75,000 was the highest amount awarded "for mental distress in the insurance context" – until this case. The Court of Appeal reduced the trial judge's amount by half, to $90,000, but it is still the highest-ever damages award in Canada in this context.
Punitive damages: Reduced from $500,000 to $60,000
Both the trial judge and Court of Appeal were keenly aware that punitive damages are only awarded against Insurers in exceptional cases. The trial judge had awarded $500,000 in punitive damages. The Court of Appeal noted that "only a few" prior awards had exceeded $100,000. It was relevant for the Court of Appeal that the Insurer had not denied coverage and had in fact overpaid benefits; it had not tried to profit from the Insured's vulnerability. However, it was also relevant that this was not the first time punitive damages had been awarded against National Life (punitive damages were awarded against National Life in another case).
The Court concluded that what was needed was "a sharp jab, not a concussive blow" to rebuke the Insurer for its bad faith conduct, as the Insurer was aware that the Insured was stressed and vulnerable. In the end, the Court of Appeal reduced the punitive damages award to $60,000.
- The standard of good faith applies to discretionary services like rehabilitation once offered. In general, insurers must carefully consider how they are handling their files, be able to back up their conclusions with reasonable and rational evidence, and remain forthright in communications with the insured – especially in contracts meant to protect the insured's "peace of mind." Insurers will have to be cautious when deciding to commence rehabilitation benefits, as they will not be permitted to stop them even in the face of it appearing the insured will not return to work (without risking a finding of bad faith, and a corresponding award of damages). Insurers may need to consider more explicit provisions in the contract to mitigate what could be a significant change in the way rehabilitation benefits have been engaged in the past.
- Courts in Nova Scotia are not hesitating to award large damages awards against insurers, whether they are contractual damages for the insured's mental distress, or punitive damages for particularly egregious conduct by the insurer. Further, if an insurer has a history of such awards imposed against them in other cases, this will likely increase the frequency and amount of punitive awards against the same insurer.
PART II: NOVA SCOTIA'S NEW LIMITATION OF ACTIONS ACT
Nova Scotia's new Limitation of Actions Act3 came into force on September 1, 20154. Here are the highlights for life, critical illness, and disability insurers:
- As before, a policy cannot prescribe a limitation period that is shorter than the applicable legislation. Limitation periods in other statutes, such as the Nova Scotia Insurance Act, will continue to govern breach of contract claims against life and disability insurers.
- The Act creates a new basic limitation period of 2 years for most claims – including negligence claims following a motor vehicle accident (cf. 3 years under the former Act)5. The clock starts ticking when the claim is discovered6.
- The Act also creates an ultimate limitation period of 15 years "from the day on which the act or omission on which the claim is based occurred."
- Section 12 of the new Act provides for a possible extension of 2 years after the expiry of the limitation period, but only if the claim is one "brought to recover damages in respect of personal injuries." It is unlikely that a breach of contract claim would fall into this category, but a lot will depend on how the courts interpret section 12 (for example, what if the disability arises from a personal injury?).
With thanks to Jennifer Taylor for her assistance with this update.
1 2015 NSCA 104
2 The trial judge awarded $30,000 in contractual damages for mental distress based on the Insurer's refusal to prorate the clawback, and $150,000 in aggravated damages to address the breaches of good faith discussed above. The Court of Appeal treated these two awards as one combined award of $180,000 because the breaches of the Insurer's duty of good faith were also contractual breaches, and should have been considered under the same "head" of damages.
3 SNS 2014, c 35
4 The former Limitation of Actions Act (now renamed the Real Property Limitations Act; substantial amendments not yet reflected in online consolidation) will have to be read together with the new one for a while, in order to determine when existing claims (claims that arose before the new Act came into force) expire.
5 See our previous post on the new Act, focusing on MVA claims.
6 Note that "claim" and "discovered" are both defined terms in the Act; see also our previous update on rolling limitation periods.
7 Note that "personal injuries" is not defined in the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.