Renewed Faith

Bad faith litigation and large awards of punitive damages have been features of the legal scene in the United States for many years. There has been much debate about whether or not Canadian courts would follow suit by broadening the exposure of insurers to bad faith claims.

In particular, the 2001 Supreme Court of Canada decision in Whiten v. Pilot Insurance Co. to reinstate a jury award of $1 million for bad faith damages seemed a harbinger of change. However, two recent cases by the Courts of Appeal in Saskatchewan and British Columbia suggest that Canadian courts will continue to uphold a more conservative approach towards bad faith claims.

It is a well-accepted principle that insurance contracts are contracts of “utmost good faith,” as noted in the Alberta Court of Queen’s Bench decision, Adams v. Confederation Life Insurance Co., in 1994. The principle applies to both the insured and insurer, and requires the parties to act with honesty and fairness in their dealings with one another.

Bad faith claims can arise from the obligations owed to the insured in first-party claims where a benefit or indemnity is paid upon the happening of an insured event. Further, third-party bad faith claims arise from claims made under a liability policy where the interests of insured and insurer diverge.

A failure to act in good faith towards an insured may lead to an award of punitive damages. Typically, these damages were the exception rather than the rule, and were imposed only if the wrongful conduct was high-handed, malicious, arbitrary or highly reprehensible. A simple mistake on the part of the insurer would not normally constitute bad faith.

C.P. V. RBC LIFE INSURANCE COMPANY

British Columbia’s Court of Appeal, in C.P. v. RBC Life Insurance Company, recently addressed a claim for bad faith damages in the case of first-party benefits under a disability policy. C.P. received benefits from her insurer over a number of years, but there was a period of time, roughly nine months, during which her benefits were discontinued. They were eventually reinstated and C.P. commenced an action alleging breach of good faith and resultant mental stress. She sought punitive damages of between $1.3 million and $1.6 million.

RBC had one person handling C.P.’s benefits from the onset of the disability claim in 2006 until 2009. However, commencing in 2009, there were a number of personnel changes. In the ensuing confusion, RBC violated some of its own internal policies, resulting in a disruption in benefits. At trial, RBC admitted that the claim had been mishandled. By that time, RBC had corrected its error and reinstated the claim.

The trial court considered whether the insurer had merely been “sloppy” in its claims-handling process, or whether its conduct amounted to “deflection and delay aligned with RBC’s financial interest.” In short, if the insurer derived a financial benefit, could this be considered bad faith?

Ultimately, the trial court rejected the claim of bad faith on the basis that “sloppiness” in the claims administration process did not equate to egregious conduct warranting an award of punitive damages. While the court awarded a small amount for mental distress, no damages were awarded for bad faith.

At the Court of Appeal, C.P. submitted the test for punitive damages as a result of bad faith conduct should be objective and based on the following:

(a) the absence of a reasonable basis for denying benefits; and

(b) the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.

The Court of Appeal confirmed that the correct test for punitive damages remains that set out in the Supreme Court of Canada decision, Fidler v. Sun Life Assurance Co. of Canada, released in 2006. In particular, in order to attract an award of punitive damages, “the impugned conduct must depart markedly from ordinary standards of decency – the exceptional case that can be described as malicious, oppressive or high-handed and that offends the court’s sense of decency.”

The Court of Appeal upheld the trial judge’s conclusions that there was no improper purpose on the part of RBC and, thus, the mere sloppy handling did not reach the “malicious, oppressive or high-handed” threshold and did not depart from the ordinary standards of decency.

ZURICH LIFE INSURANCE COMPANY LIMITED V. BRANCO

The Court of Appeal for Saskatchewan recently had a similar opportunity to review the test for punitive damages in Zurich Life Insurance Company Limited v. Branco. The 2015 case also involved a claim for disability benefits from two separate providers, Zurich and AIG (American International Group).

At trial, the judge found that both Zurich and AIG had acted in bad faith and awarded $4.5 million in punitive damages, an amount that Saskatchewan’s Court of Appeal described as “unprecedented” in Canadian law.

The plaintiff worked for a Canadian mining company in Kyrgyzstan when he injured his foot. While the injury at first appeared to be minor, the plaintiff, ultimately, required surgery and never returned to work. Over a number of years, benefits were variously provided and suspended because of disputes over medical documentation, medical examinations and attendance for vocational retraining.

AIG originally attempted to settle the plaintiff’s claim for a very small amount. Years later, and just prior to trial, AIG paid the plaintiff a permanent functional impairment award, along with past benefit amounts still owing.

With respect to Zurich, the insurer confirmed that the plaintiff was entitled to long-term disability benefits for a set period of time during which he could not perform his “own occupation.” However, rather than simply pay the benefits, Zurich made an offer to the plaintiff to settle his claim for the amount of benefits, less the insurer’s legal fees. In addition, Zurich initially denied that the plaintiff was entitled to further benefits for being unable to perform “any occupation.”

Ultimately, Zurich paid further benefits, but not until years after the plaintiff’s claim.

The trial judge awarded punitive damages of $3 million against Zurich because the insurer had tried to take advantage of the plaintiff’s economic vulnerability and had not administered his claim in good faith.

As against AIG, the trial judge awarded punitive damages of $1.5 million and concluded that the insurer had acted in bad faith by discontinuing benefits because the plaintiff refused to attend what was deemed to be an inappropriate vocational program, and by attempting to force the plaintiff into accepting a low settlement offer.

Saskatchewan’s Court of Appeal found that the trial court made a number of factual and legal errors in arriving at its decision.

The court specifically acknowledged that AIG had attempted to secure the plaintiff’s co-operation numerous times throughout the claims process. Despite that, the court upheld the bad faith finding against AIG, but found the scope of AIG’s discreditable conduct was narrower than that found by the trial judge.

The appeal court concluded that AIG had failed to pay benefits without proper reason and it attempted to lever the plaintiff into accepting an unfairly low settlement of his global claim.

In the course of its reasons, the Court of Appeal conducted a review of the case law, noting the high-water mark for damages in Whiten. The other cases cited awarded punitive damages within a range of $55,000 to $450,000.

The court explained that the level of blameworthiness is influenced by many factors and “the more reprehensible the conduct, the higher the award.”

It set out the following relevant considerations:

• the blameworthiness of the defendant’s conduct;

• the degree of vulnerability of the plaintiff;

• the harm directed at the plaintiff;

• the need for deterrence;

• the amount of other penalties; and

• the advantage wrongfully gained by the defendant.

The Court of Appeal for Saskatchewan found that AIG improperly denied the plaintiff’s claim and then used its denial to attempt to persuade the plaintiff to accept an unfairly low settlement at a time when he was financially vulnerable. The court concluded that this exploitation of the power imbalance was highly relevant in assessing the award of punitive damages.

In assessing the need for deterrence, the court stated that, “the insurance industry as a whole must understand the consequences of failing to act in accordance with its obligations to insureds.” Thus, the court made its award to act as a deterrent to the industry in general, not just the company that had committed the breach.

As for Zurich, the Court of Appeal upheld the trial court’s finding that Zurich had acted in bad faith by improperly trying to take advantage of his economic vulnerability to gain leverage in negotiating a settlement.

However, the court reiterated that, with respect to Zurich’s failure to pay the “any occupation” claim, an insurer’s violation of a contractual obligation is not, in and of itself, a failure to meet its duty of good faith. Insurers are not held to a standard of absolute perfection in this regard, and Zurich did not act in bad faith by failing to accept the claim.

Ultimately, the Court of Appeal upheld the finding of bad faith against both insurers, but reduced the damages significantly. Damage awards against AIG and Zurich were lowered to $175,000 and $500,000, respectively, an overall reduction of more than $3.8 million.

With respect to AIG, the court found that the sum of $175,000 was proportionate to AIG’s blameworthiness, the vulnerability of the plaintiff and the need for deterrence. As for Zurich, it found the trial judge’s award to be so high as to be irrational and out of line with precedent.

RETURN TO RATIONAL THINKING

The dramatic reduction of damages by the Court of Appeal in Branco signals a return to rational thinking in the setting of punitive awards and an approach to damages that seeks some degree of proportionality in relation to the level of blameworthiness of the insurer.

This decision, along with the C.P. v. RBC Life Insurance case, also recognizes that insurers cannot be held to a standard of perfection and that an improper denial or mere sloppiness in the handling of claims will not be sufficient by themselves to ground an action in bad faith.

Alexander Holburn Beaudin + Lang LLP is a member of The Arc Group of Canada, a network of independent insurance law forms across Canada.