A recent Saskatchewan Court of Queen’s Bench decision, Branco v. American Home Assurance Co., awarded aggravated and punitive damages in the millions against the insurers. This case attracted the attention of everyone in the insurance industry due to the high awards: a total of $450,000 in aggravated and $4.5 million in punitive damages were awarded against AIG (American Home Assurance) and Zurich Life Insurance Co. Ltd.
However, insurers need not feel threatened by this case. The large aggravated damages award represents a significant departure from previous awards; yet the court failed to justify the substantial increase in aggravated damages. Furthermore, this case does not change the limited circumstances in which punitive damages may be ordered. The distinctive manner in which the disability claim was adjudicated and subsequently handled during the litigation process is what attracted punitive damages.
Plaintiffs should not presume to be entitled to such large awards. The Supreme Court of Canada in 2002’s Whiten v. Pilot Insurance Co. recognized that aggravated damages are compensatory in nature. Although the conduct of the defendant is relevant, the quantum of the aggravated damages should reflect the plaintiff’s non-pecuniary loss. In long-term disability actions, it should compensate for mental distress that arises from humiliating or oppressive conduct on the part of the insurer.
Similar to other instances where damages are awarded for injury, a range for mental distress awards has developed. According to the 2006 trial decision in Rowe v. Unum Life Insurance Co. of America, courts have ordered between $10,000 and $50,000 in aggravated damages for mental distress in LTD actions. Another LTD trial decision in Ontario, Clarfield v. Crown Life Insurance Co. in 2000, awarded $75,000 in aggravated damages, but that seems to have included $40,000 for financial losses. Even the Supreme Court of Canada’s Fidler v. Sun Life Assurance Co. of Canada, the leading case on aggravated damages in LTD actions, fell within the above range by awarding $20,000.
These awards are not granted as a result of slight mental discomfort. The court in Fidler made it clear the degree of mental distress should be sufficient to justify compensation. An award of aggravated damages is not appropriate for trifling disturbances. Thus, the significant award for mental distress in Branco should be questioned. No significant analysis is provided to explain the departure from the established range for the aggravated damages.
While the court in Branco found the plaintiff’s mental distress to be significant, so did the courts awarding damages within the established range. We suspect the relatively large award for aggravated damages contained a punitive component. However, punishment is not the purpose of aggravated damages. To hold otherwise is to risk double-recovery in the event that punitive damages are also awarded.
The purpose of awarding punitive damages is for the retribution, denunciation, and deterrence of misconduct that represents a marked departure from ordinary standards of decent behaviour. Ultimately, when an insurer breaches its duties under the policy in bad faith and does not deal with the insured’s claim fairly, punitive damages may be awarded. In Whiten, the court awarded $1 million in punitive damages. The Supreme Court of Canada found this award to be high but within the rational limits.
In Branco, the court found the insurers had knowledge the plaintiff was totally disabled but purposefully exerted financial pressure over him by withholding payment of disability benefits, for seven years, in an effort settle the claims for a significantly reduced amount. Zurich had approved the plaintiff’s claim in 2002 but did not make any disability payments until 2009. Important to the court’s decisions to award punitive damages was the fact there was no medical evidence disputing disability. The court therefore found the insurers had denied, or terminated, the plaintiff’s claim in bad faith.
Branco has not changed the circumstances in which punitive damages will be awarded. They are reserved only for the punishment and deterrence of reprehensible behaviour. The $3-million award against Zurich and $1.5 million against AIG went well above the $1 million awarded in Whiten, which was decided at the time the claim was being handled.
The court’s view in Branco was the $1-million award in Whiten did not successfully catch the attention of insurers. Moreover, a previous $60,000-damages award against AIG to punish similar conduct was found to be ineffective. However, the jump from $60,000 to $1.5 million on similar facts does not seem to be a measured increase. The $3-million award against Zurich is even more disproportionate.
This case serves as a reminder to insurers that the insured should be prudently paid when claims are proven and acknowledged. As disability insurance defence lawyers, we see many files with competing evidence as to the question of disability. Insurers that adjudicate and manage claims in a diligent and reasonable manner and make decisions on claims based on the totality of the evidence need not be concerned about attracting punitive damages. Such an award requires something more than simply a wrong decision on a claim.
Branco does not change the legal framework for awarding aggravated and punitive damages. That being said, the quantum of damages ordered has far surpassed the established range of awards in long-term disability actions. One thing is for sure, where there is egregious conduct, insurers should be aware there will be significant aggravated and punitive damages awarded.
Steve Simpson and Stephanie Neate are lawyers at Bennett Gastle P.C. They practise insurance defence law with a focus on long-term disability claims. Steve and Stephanie can be reached at [/em]firstname.lastname@example.org and email@example.com.