Canadian Underwriter

Top court will not hear appeal of Sask. appeal court’s reduction of punitive damage against insurers found to have breached duty of good faith

April 25, 2016   by Canadian Underwriter

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The Supreme Court of Canada recently announced it will not hear an appeal from a claimant over a decision, by the Saskatchewan Court of Appeal, which reduced $4.5 million in punitive damages against two insurance companies, in a lawsuit over a disputed claim arising from a foot injury.

One precedent cited was the 2002 ruling, by the Supreme Court of Canada, which restored a jury award of $1 million in punitive damages against Pilot Insurance Company, which had denied a homeowner claim from Daphne Whiten, based on allegations of arson.

In 2013, the Saskatchewan Court of Queen’s Bench found Zurich Life Insurance Company Ltd. and American Home Assurance Company “liable to pay an unprecedented total of $4.5 million in punitive damages and $450,000 in damages for mental distress because of how they had administered” claims by Luciano Branco, wrote Mr. Justice Robert Richards, Chief Justice of Saskatchewan, on behalf of the Court of Appeal for Saskatchewan on June 19, 2015.

In 2013, Mr. Justice Murray Acton, of the Saskatchewan Court of Queen’s Bench, suggested that punitive damages assessed against insurers, for breach of good faith  – such as the $1 million award against Pilot in Whiten – “appear to have done little or nothing to deter insurance companies from their actions.”

But its June, 2015 ruling, the Court of Appeal for Saskatchewan reduced the award of punitive damages, against American Home, to $175,000 and reduced the award of damages for mental distress, against American Home, from $150,000 to $15,000. In its unanimous ruling, the Court of Appeal for Saskatchewan reduced the punitive damages assessed against Zurich to $500,000, and reduced the award of damages for mental distress, against Zurich, from $300,000 to $30,000.

Punitive damages “‘straddle the frontier’ between civil and criminal law,” Saskatchewan Chief Justice Richards wrote. “If the actions of a civil defendant are so outrageous, malicious, oppressive or high-handed that a court has no choice but to conclude that the actions are deserving of punishment, a remedy must be available. Accordingly, when criminal sanctions are not available, punitive damages can be used to address the relevant wrongdoing.”

The size of the award against American Home – a subsidiary of American International Group Inc. – “is simply too extravagant to be sustained,” Chief Justice Richards wrote in June of 2015.

The awards of mental distress, against AIG and Zurich, “far exceeds the much more modest awards which have been made to other insureds who have suffered extended periods of financial insecurity with similar-type consequences to those experienced by Mr. Branco,” Chief Justice Richards added at the time.

On Oct. 22, 2015, Branco applied for leave to appeal with the Supreme Court of Canada, which announced April 21, 2016 that  it dismissed Branco’s application for leave to appeal.

In the Whiten decision in 2002, the Supreme Court of Canada provided “significant clarification as to the nature of punitive damages,” Chief Justice Richards wrote in Branco.

The Whitens’ home was destroyed by fire in 1994.  The local fire chief and an engineer retained by Pilot said the fire was accidental. Court records indicate that the adjuster initially assigned to the claim (and later removed from the case) recommended the claim be paid.  The Insurance Crime Prevention Bureau, which was asked by Pilot to investigate, also recommended the claim be paid. But Pilot initially denied the $345,000 claim, alleging arson. In 1996, a jury awarded Whiten $1 million in punitive damages, plus $227,500 plus interest for replacement of the structure and contents. Two years later, the Court of Appeal for Ontario reduced the punitive damages award to $100,000, but the jury award of $1 million was restored by the Supreme Court of Canada.

“There is recognition that the primary vehicle of punishment is the criminal law (and regulatory offences) and that punitive damages should be resorted to only in exceptional cases and with restraint,” Mr. Justice Ian Binnie wrote on behalf of the Supreme Court of Canada in 2002 in Whiten.

When deciding on how much to award in punitive damages, “the focus of the quantum inquiry is not the plaintiff’s loss but the defendant’s conduct,” Saskatchewan Chief Justice Richards suggested in 2015 in Branco.

Related: History in the Making

Branco was a welder who, in 1997, entered into an employment contract with Kumtor Operating Company, a subsidiary of Saskatoon-based mining company Cameco Corp.

At the time, AIG was providing benefits to Kumtor employees for work-related injuries, based on benefits payable by Saskatchewan’s Workers Compensation Board. Zurich Life Insurance Company Limited was providing long-term disability coverage to Kumtor employees.

Court records indicate that in 1999, Branco dropped a steel plate on his foot while working for Kumtor in Kyrgyzstan on a 28-day rotation.

“He continued to work to the end of his 28 days and went home to Portugal to recuperate,” Justice Acton wrote, adding that Branco “returned to Kyrgyzstan for his next 28-day shift in February” of 2000.

But two days before the end of his 28-day shift “he stepped on a piece of steel and re-injured his foot,” Justice Acton added. “As it was only two days before the end of his rotation he finished his rotation on March 15 and returned home to Portugal.”

Branco did not return for the next rotation scheduled to begin April 15, 2000. Branco filed claims with both AIG and Zurich. Due to disputes over those claim, Branco sued AIG, Zurich and his employer in Saskatchewan.

Court records indicate that Branco filed a disability claim with Zurich on February 11, 2003 but did not receive any funds from Zurich until May 7, 2009, at which time he received a cheque for $362,198.

In 2001, he was receiving payments from AIG but an AIG adjuster discontinued his benefits in May of that year due to “insufficient medical documentation.” Two months later, AIG made a cash settlement offer.

AIG later made payments but discontinued because “Branco refused to attend an inappropriate vocational retraining program chosen by AIG,” Justice Acton wrote.

But Justice Acton “appears to have proceeded on the basis that, if Mr. Branco was disabled to some extent, he was entitled to benefits,” Chief Justice Richards wrote on behalf of Saskatchewan’s appeal court. The other judges hearing the appeal were Mr. Justice Gary Lane and Mr. Justice Maurice Herauf

“The reality of the AIG policy is considerably more complex than that as it involves obligations imposed on both the insurer and the insured,” Chief Justice Richards wrote.

“It is obvious that, given the wording of the policy, AIG must be seen to have stepped into the shoes of the [Saskatchewan Workers’ Compensation] Board for the purpose of administering claims for benefits made under the policy,” Chief Justice Richards added. The appeal court found that Justice “did not consider the specific terms of the policy when coming to his conclusions and failed to relate the terms of the policy to the facts. When the analysis on this front is conducted properly, it becomes apparent that AIG was entitled to suspend benefits as it did in 2004.”

But Chief Justice Richards added that the first suspension of workers’ compensation benefits, by AIG, in May of 2001, was “troubling” because although AIG had not received a medical report, it was the insurer who had chosen the doctor that Branco was to see.

Therefore it was “wholly inappropriate” for AIG to suspend the benefits because its adjuster “was having difficulty getting a follow-up report” from the doctor, Chief Justice Richards added.

In the case of Zurich, “there can be no doubt that it breached its duty of good faith at this time when, after receiving Mr. Branco’s claim forms, it approved his claim but then extended a settlement offer to him in the amount of $62,688 (the amount of ‘own occupation’ benefits to which he was entitled less legal fees incurred to that point in time),” Chief Justice Richards wrote. “Zurich acknowledges that what it did in this regard was wrong. The trial judge was correct in recognizing these actions as being a clear and flagrant breach of Zurich’s duty of good faith and as warranting punitive damages.”

But Justice Acton “both misunderstood the Zurich policy and made a number of palpable and overriding errors of fact in the course of deciding the nature of the conduct which might justify a punitive damage award against Zurich,” Chief Justice Richards added.

For example, the appeal court found that Zurich had a “reasonable basis” to decline to pay Branco’s “any occupation” benefits until 2009, though Zurich was wrong in refusing to pay “own occupation” benefits until 2009.

“Even if it might be successfully contended that Zurich should have begun paying ‘any occupation’ benefits before 2009, this would not translate automatically into a breach of its duty of good faith,” Chief Justice Richards wrote. “An insurer’s violation of a contractual obligation is not, in and of itself, a failure to meet this duty. Insurers are not held to a standard of absolute perfection in this regard.”