Punitive and Aggravated Damages in Long-Term Disability Claims

Claimants with group or individual long-term disability (LTD) benefits coverage who become disabled from work cannot always depend on their insurance companies to make fair decisions or provide straightforward access to benefits. In claims involving legitimately disabling health conditions, it is all too common for insurance companies to reject applications from the start or approve applications only to terminate benefits prematurely before claimants are truly fit to return to work.

When insurance companies are found to be in breach of contract denying claimants despite their eligibility for LTD benefits under policy terms, it is the norm for claimants to receive compensatory damages for unpaid benefits that were wrongfully withheld. However, claimants’ rights do not necessarily end there. Two additional heads of damages are potentially available: aggravated damages and punitive damages.

As a form of compensatory damages, aggravated damages are available when it can be proven that a breach of contract has caused mental distress. Punitive damages, on the other hand, are not meant to be compensatory. The objectives of punitive damages (also known as extra-contractual damages) are deterrence and denunciation of and punishment for insurance company misconduct so egregious as to offend the court’s sense of decency.

Punitive damages are premised on the duty of good faith owed by insurance companies to their policyholders. Insurance companies can be found to have breached this duty of good faith when decisions to deny LTD benefits are tainted by wrongdoing.

While awards for punitive damages are the exception rather than the rule, they have been made on several occasions and have a well-established place in Canadian LTD benefits litigation.

Fidler v. Sun Life

Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 SCR 3 is the leading case from the Supreme Court of Canada on the principles of liability of insurance companies for aggravated and punitive damages in the context of contracts for disability benefits.

The Plaintiff who suffered from fibromyalgia and chronic pain syndrome was initially approved for LTD benefits but was later denied when Sun Life obtained surveillance video. The insurance provider asserted that the video evidence demonstrated the Plaintiff’s ability to work. Sun Life reversed its denial as the trial date approached, reinstated the plaintiff’s LTD benefits, and paid arrears with interest, leaving punitive and aggravated damages as the remaining issues to be resolved.

In its comments on aggravated damages, the court described LTD benefits policies as contracts for not only tangible benefit payments, but also for the intangible benefit of the “knowledge of income security in the event of disability.” In other words, these plans provide policyholders the benefit of “peace of mind.” The court accepted that at the time of formation of such peace of mind contracts, it is in the reasonable contemplation of the parties that aggravated damages for mental distress can result from breach.

The court stated that liability for aggravated damages in each claim depends on whether the insured “genuinely suffered significant additional distress and discomfort” arising from a breach of contract and loss of disability coverage. By upholding the $20,000 award for punitive damages in this case, the court referred to the extensive medical evidence documenting the stress and anxiety that the plaintiff experienced.

Fidler is considered to have lowered the bar in claims for aggravated damages in a few ways.  In contrast to earlier cases involving aggravated damages, an award was made without any evidence of a distressing event caused by a denial of benefits. These might include a forced sale of a home, cashing in an RRSP or having to resort to resort to social assistance. While such evidence will typically lead to higher awards when present, it is not strictly necessary. Also, the court in Fidler explicitly rejected the notion that claimants in pursuit of aggravated damages should have to prove bad faith on the part of insurance companies.

In its discussion on punitive damages principles to be applied in LTD benefits cases, the court remained consistent with its own precedents.  It was confirmed that the contractual obligation to pay LTD benefits to eligible claimants and the obligation to deal with claims in good faith are to be treated as independent obligations; breaches of both obligations must be found to allow a claim for punitive damages.

In other words, an incorrect denial is not necessarily a denial in bad faith. There must be a marked departure from the good faith standards binding insurance companies in their decision-making to attract a punitive damages award. The court elaborated on such good faith standards as follows:

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 obligation to pay a claim.  Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.

Although the court in Fidler validated the availability of punitive damages awards in LTD benefits cases in principle, it was found on the particular facts of the case that such an award was not warranted.

Aggravated and Punitive Awards in LTD Claims Since Fidler

Since Fidler was decided, aggravated damages awards in LTD claims have been made from a low of $10,000 to a high of $90,000. Most awards fall in the $20,000 – $35,000 range.

Punitive damages in LTD claims since Fidler have been awarded in the $30,000 – $500,000 range. While not intended as an exhaustive list, forms of insurance company misconduct leading to findings of bad faith and awards of punitive damages have included the following:

• Relying on an exaggerated interpretation of surveillance evidence not reasonably supportive of denial
• Basing a decision to terminate in a vacuum of medical evidence
• Denying benefits based on an incomplete medical investigation
• Mischaracterizing a medical record by “cherry-picking” certain findings
• Failing to investigate mental aspects of a disability
• Importing or applying tests for disability beyond those set out in the policy (e.g., requiring objective evidence of physical injury)
• Basing a decision to terminate on an unreasonably unreliable insurer medical examination
• Taking advantage of financial hardship (e.g., using litigation delay tactics to extort a discounted settlement)

Contact Preszler Injury Lawyers

Preszler Injury Lawyers are committed to upholding the rights of our clients in LTD benefits claims by pursuing claims for aggravated and punitive damages to the fullest extent possible, whenever there are grounds for doing so. Our track record of success in this area includes the decision in Fraser v. Fenchurch, 2022 ONSC 6222 to award $150,000 in punitive damages following a trial conducted by our own David Preszler.

This article was written by Mark Freeman.