By Richard HaylesGilbertson Davis Emerson LLP, Toronto *

Although punitive damage awards in disability insurance cases are a fairly recent phenomenon, the principles applicable to a consideration of punitive damages in the disability insurance context do not differ from the established principles that apply to punitive damage awards generally. In Canada, these principles are derived from a series of decisions in the Supreme Court of Canada, beginning in 1989 with Vorvis v. Insurance Corporation of British Columbia¹, and continuing with Hill v. Church of Scientology of Toronto², and Whiten v. Pilot Insurance Company³.

PART I. GENERAL PRINCIPLES GOVERNING PUNITIVE DAMAGES

Most damage awards in our system are compensatory in nature; that is, they are intended to compensate the plaintiff for the loss he has suffered as a consequence of the defendant’s wrongful conduct. In disability insurance cases, the wrongful conduct consists of the insurer’s failure or refusal to pay benefits that are properly owing. This constitutes a breach of contract, and the defendant is liable for losses that the breach causes the plaintiff. Compensatory damages consist primarily of the amount of disability benefits that ought to have been paid during the period when the insured was disabled under the policy definition of “total disability”.

Aggravated damages are also compensatory in nature; rather than compensating the plaintiff for his direct financial loss, aggravated damages are intended to compensate for intangible losses arising out of the insurer’s breach of contract, such as mental distress resulting from the financial plight ofa disabled insured who finds she is unable to collect the anticipated benefits⁴.

Punitive damages differ from the compensatory damages awarded in disability cases. Under the principles established in Vorvis, Hill, and Whiten, the purpose of a punitive damage award is not to compensate the plaintiff for his loss; rather it is to punish the defendant for conduct which the judge or the jury finds to be so outrageous or unacceptable that an additional award of damages is required in order to deter the defendant and other insurers from engaging in similar reprehensible behaviour in the future. For this reason, punitive damages are only awarded in circumstances where the combined award of general and aggravated damages is insufficient to achieve the goal of deterrence⁵.

A disability insurance policy is a contract. Traditionally, Anglo-Canadian jurisprudence does not view a breach of contract in itself as being sufficiently morally reprehensible so as to call for punishment. Thus, although the court may conclude that the plaintiff was in fact disabled, and that the defendant’s failure to pay constituted a breach of contract, this will not automatically result in an award of punitive damages. In order to justify an award of punitives, an “independent actionable wrong”, in addition to the mere breach of contract, is required⁶.

An insurance policy, of course, is a contract of utmost good faith, and imposes higher duties on the parties than is the case with contracts in general. Since the disability insurer is required to act in good faith, the plaintiff will usually seek to find some improper conduct on the part of the insurer in the claims adjustment process that would amount to a separate, actionable wrong so as to meet the threshold requirement for an award of punitive damages.

As will be seen below, the good faith obligation goes both ways, and the insured is also called upon to exhibit good faith in his dealings with the insurer. As a consequence, fraud on the part of the insured in the presentation of his claim can also constitute an actionable wrong leading to an award of punitive damages against the disability claimant and in favour of the insurance company.

Since the basic principles established by Vorvis, Hill, and Whiten apply in the disability insurance context, whether the question is one of punitive damages claimed by an insured against an insurer, or by an insurer against an insured, it is useful to summarize these principles here:

• Punitive damages are only awarded in situations where the defendant’s misconduct is malicious, oppressive, and high-handed, such that it offends the court’s sense of decency. Conduct that would attract an award of punitive damages has also been described as “harsh, vindictive, reprehensible and malicious”, and “extreme in its nature and such that by any reasonable standard it is deserving of full condemnation and punishment”;
• The descriptions set out above do not exhaust the list of possible kinds of conduct that would be capable of attracting an award of punitive damages;
• Since the purpose of the award is to punish and deter the defendant, it is irrelevant that the punitive damages exceed the amount required to compensate the plaintiff, and are therefore a “windfall” in the plaintiff’s hands;
• Punitive damages are intended to be “very much the exception”.

With respect to the quantification of punitive damages awards, the courts have said the following:

• Although the objective of punitive damages is punishment, the primary institution for punishment in our legal system is the criminal law, and the amount of damages should be assessed having regard to any criminal punishments, including fines and regulatory assessments, that have been suffered by the defendant;
• The governing rule for quantum is proportionality, so the amount of punitive damages must be rationally connected to the deterrence of the conduct that the court is seeking to prevent;
• The lowest award that would serve the purpose of deterrence is the appropriate award, since a higher award would serve no useful purpose and therefore would be irrational;
• The appropriate focus in setting punitive damages is not the plaintiff’s loss, but the defendant’s conduct;
• The courts have usually found that the imposition of moderate punishments is generally sufficient because of the stigma that an award of punitive damages carries in the broader community;
• Appropriate consideration should be given to aggravating factors, such as whether or not the misconduct was planned and deliberate, the motive of the defendant, whether the conduct was carried out over a lengthy period of time, any attempts by the defendant to cover up its misconduct, whether or not the defendant knew that what he or she was doing was wrong, whether the misconduct involved breach of a trust or other personal obligation owed by the defendant to the plaintiff, any profits received by the defendant as a result of its improper behaviour, and the vulnerability of the plaintiff, including financial vulnerability, such that there is a power imbalance as between the defendant and the plaintiff;
• By the same token appropriate consideration must be given to mitigating factors, such as whether or not the conduct in question constitutes an isolated incident, any punishments that the defendant has already been exposed to in the criminal system, and whether or not the defendant has displayed remorse or made an attempt to apologize or make up for her misconduct.

Since punitive damages are damages at large, there is no upper or lower limit imposed by law. As we all know, this can mean that the amount awarded in a jury case is difficult to predict and can result in an unpleasant surprise to a defendant who has incurred the jury’s disfavour. The courts have set out the following principles with respect to the assessment of punitive damages by juries:

• The jury ought to be told that while the state would normally be the recipient of any fine or penalty imposed for misconduct, in this case the plaintiff will retain the punitive damages award in addition to compensatory damages received;
• The court may suggest a range of appropriate awards to the jury, but only if counsel consents;
• Counsel should consider asking the trial judge to advise the jury of the amounts that have been awarded in similar cases, where the award has been upheld on appeal;
• The amount of punitive damages awarded by a jury is reviewable by an appellate court, but is entitled to a certain degree of deference;
• When the punitive damages, together with the jury’s award of compensatory damages, adds up to an amount that is so “inordinately large” that it exceeds the amount rationally needed to punish the defendant, it is to be reduced or set aside on appeal.

PART II PUNITIVE DAMAGES AWARDED AGAINST A DISABILITY INSURANCE CLAIMANT

Andrusiw v. Aetna Life Insurance Company of Canada⁷ is the only reported decision in which a Canadian court has made an award of punitive damages against a disability insurance claimant.

The plaintiff was the president and a part owner of a pre-cast concrete manufacturing company. In his application for disability insurance coverage, he described his duties as “supervising, office admin.” It appears that the plaintiff was the chief executive officer of the company; his primary duties involved estimating, sales, and office administration, as well as dealing with banking and the financing of the company. His co-owner and partner was secretary-treasurer, and was primarily responsible for the “yard operations”, meaning the actual manufacture of pre-cast concrete components.

The plaintiff obtained a disability insurance policy under which the defendant agreed to pay him $2,050.00 per month for total disability, which was defined in the policy as follows:

Total disability means the inability of the person insured, due to injury or sickness, to perform the important duties of his or her regular occupation or employment. However, total disability will not exist while the person insured is engaged in any gainful occupation or employment.

The policy also contained an alternative “assumed total disability” definition, under which the insured would be deemed to be totally disabled if he suffered the “total and irrevocable loss” of the use of various physical functions, including the loss of use of “a hand and a foot”. The provisions of the assumed total disability clause were stated to operate regardless of the insured’s ability to engage in his occupation or employment. In addition, the policy contained a waiver of premium clause, under which the policy would continue in force without payment of premium during a period of total disability.

The plaintiff suffered a stroke in February of 1986. After his discharge from hospital in April of that year, he spent a few months in a rehabilitation facility, following which he was discharged home. The plaintiff recovered from his stroke to a significant degree, but he did suffer a permanent reduction in the functional use of his left arm and leg. Although he was able to ambulate with the use of a cane and foot brace, his gait was affected.

The plaintiff did regain full, normal use of the right side of his body. He claimed, however, that the stroke had a continuing effect on his stamina and his cognitive abilities, such that he was no longer able to work at his previous occupation. His claim for disability benefits was approved, and he was in receipt of the monthly disability benefit, as well as waiver of premium benefits, for a period of approximately 10 years. During this time, the defendant requested periodic claimant’s and attending physician statements. In the claimant’s statements, the plaintiff would typically state that he remained a shareholder in his company, but that it was being managed by employees and that his involvement was limited to occasional visits to the office to “see how things are going”. He declared that he was unable to do most of his duties as “my stamina does not last very long”. In addition, he advised the insurance company that his condition was by and large unchanged, that he was still paralyzed on his left side and suffered from dizzy spells, poor memory, poor circulation, and swollen legs.

The plaintiff’s position was supported by his own doctors in the attending physician’s statements. In the initial reports, they stated that the plaintiff was incapable of any type of gainful employment. By January of 1997, however, the plaintiff’s family doctor acknowledged that he could probably do limited clerical tasks, but would not be able to perform the work he had done prior to his illness.

In 1996, the Calgary Police Department received information through a Crime Stoppers program indicating that the plaintiff was working. The police passed this information on to the defendant insurer, who, as a result of an investigation, terminated the plaintiff’s benefits. The plaintiff initiated an action against the insurance company, which counterclaimed for the return of all of the benefits paid between January 1st, 1987 and January 26th, 1997, including waiver of premium payments foregone during that period, and for punitive damages based on the plaintiff’s fraud.

At trial, the plaintiff testified that his activities in the office were limited to signing contracts and any other legal and accounting documentation that required his signature, plus occasionally answering the telephone, doing some of the banking, and attending to some purchasing. He was adamant that he was unable to do any of this on a regular basis, however, and stated that he relied on his office manager and outside accountant to run the business for him. He concluded his cross-examination by saying that while he was in the office, he spent 80 percent of his time looking at magazines and not working.

The defendant insurer called six former employees of the plaintiff’s company, as well as the plaintiff’s partner, to give evidence. The testimony of these witnesses was in stark contrast to that which had been given by the plaintiff.

The evidence provided by the office manager was typical. She stated that during the first year following the stroke, the plaintiff attended the office only occasionally. Within two years, however, he was working full-time, arriving at around 10:00 in the morning and leaving at 5:00 p.m. or later. After this, the office manager testified that the plaintiff ran the company, signing cheques and documents and reviewing accounts payable, and making decisions such as the purchase of new manufacturing equipment. According to the office manager, no one could make any major decision without the plaintiff’s approval. She stated that the plaintiff was “always the boss”, and that apart from the unusual gait resulting from the loss of the full use of his left leg, he had no other limitations and was mentally able to do his job as he had performed it prior to the stroke.

Although the other former employees were all employed at lower levels of responsibility, they corroborated the office manager, to the effect that within two years of the stroke, the plaintiff was working on a full time basis, and was managing the company in every way that could be expected of a chief executive officer.

The plaintiff’s partner stated that the plaintiff was working full time by the spring of 1987, and that as far as the partner was concerned, the plaintiff “ran the office and was the boss”.

Other evidence tendered at trial showed that the plaintiff’s company had fared extremely well during the period of his alleged disability. In 1992, the company bought out a major competitor, and merged the operations of the two businesses. In 1996, the plaintiff bought out his partner pursuant to Buy Sell Agreement, and from that point forward, the plaintiff was the majority share holder and sole director of the holding company that had been created to run the merged business. Revenues had increased from approximately 1.3 million dollars in the year preceding the plaintiff’s stroke to a total of nearly 7 million dollars in the fiscal year ending in February of 1996.

Although one would normally expect plaintiff’s counsel to be able to attack evidence provided by past employees and the former business partner on the basis that their relationships with the plaintiff had broken down following business or employment disputes, and that they could not be believed because they were “disgruntled employees” in this case, however, it appears that most of the employees had left on good terms, and for non-contentious reasons, such as retirement or the sale of a division of the company. The testimony of the former employees and partner was therefore highly credible, and since the plaintiff failed to call any current or former employees to testify on his behalf, this evidence was uncontradicted. Although the plaintiff called one of his physicians, and appears to have filed medical reports prepared by other doctors, the court was forced to conclude that the statements of the doctors confirming disability were premised on false information that had been provided to the physicians by the plaintiff regarding his actual day to day activities.

The trial judge therefore came to the following conclusion regarding the plaintiff’s ability to work:

In the result, I find that the plaintiff is able to perform important duties of his occupation and employment and has done so since January 1, 1987. I am also satisfied that the plaintiff failed to inform the defendant of his ability to work from at least that date onward, and on each occasion when requested by the defendant for advice as to his condition, falsely advised the defendant that he had not returned to work and was unable to perform such physical and mental duties as were needed to be performed in his role as president, supervisor and office administrator. Indeed, the plaintiff was the person in charge of the companies and successfully functioned as their chief operating officer.

On the issue of fraud, the court underlined the requirement for a higher degree of probability of proof than simply a finding based on a balance of probabilities. He referred to the following passage from the decision of Lord Justice Denning in Bater v. Bater⁸,

A civil court, when considering a charge of fraud will naturally require a higher degree of probability than that which it would require if considering whether negligence were established. It does not adopt so high a degree as a criminal court, even when considering the charge of a criminal nature, but still it does require a degree of probability which is commensurate with the occasion.

Thus, although the trial judge acknowledged that the onus of proof was high, the defendant had satisfied it:

I am satisfied also that the Plaintiff in his statements of continuing disability commencing November 15, 1989 knowingly misrepresented his ability to do so to the Defendant with the intention of misleading the Defendant and inducing it to continue making payments under the policy. He also misled the medical doctors treating him or examining him, such that their reports to the Defendant misrepresented the Plaintiff’s ability to be gainfully employed in his occupation as President, supervisor and administrator of his companies.

Plaintiff’s counsel attempted to rehabilitate his case by referring to the above-mentioned “assumed total disability” clause, under which the plaintiff was deemed to be totally disabled if he had suffered “total and irrevocable loss . . . of the use of . . . a hand and a foot”.

In dealing with this argument, the judge took note of the fact that the plaintiff had not presented his claim on the basis of the assumed total disability clause, although he had a copy of the policy in his possession at all times, and was fully able to advance his claim in this fashion had he chosen to do so. Indeed, the assumed total disability argument was not raised until the Statement of Claim was amended shortly prior to trial.

The trial judge referred to a series of property insurance cases in support of the proposition that the disability insurance policy itself was invalidated as a consequence of the plaintiff’s fraud in the submission of his claim. According to the court, the principle of law involved is not derived solely from the fire insurance statutory conditions that are commonly incorporated into property insurance policies, under which a claim is vitiated as a consequence of fraudulent statements in the proof of loss. Rather, the judge in Andrusiw stated that the principle is derived from the obligations of utmost good faith that “apply to all forms of insurance contracts unless legislation changes the common law position”.

Since the plaintiff had chosen to submit his claim as a total disability claim rather than as an “assumed total disability” claim, and since the plaintiff had made fraudulent statements in support of that claim, the entire claim was vitiated and nullified by the plaintiff’s fraud, and it was irrelevant that the plaintiff might have succeeded had he chosen to advance the claim under the “assumed total disability” provision.

This finding by the Alberta Court of Queen’s Bench in Andrusiw could have a great deal of significance for the industry as a whole. If supported by higher courts, or by other courts in different jurisdictions, it could establish that fraud by an insured claimant puts the insurer in a position to void the policy, notwithstanding the fact that there is no equivalent of the fire insurance statutory condition regarding fraudulent proof of loss to be found in the uniform legislation that governs life and disability insurance policies in the common law provinces of Canada. On the other hand, the court in Andrusiw went on to find that as a matter of fact, the plaintiff had not suffered total loss of use of his left arm and foot, since he was able to walk and weight bear using his left leg, notwithstanding that a brace was required along with a cane, and that his gait was uneven. It is therefore arguable that the judge’s conclusions regarding the effect of fraudulent statements on the validity of the disability policy itself were obiter dicta.

Plaintiff’s counsel was also unsuccessful in his attempt to invoke the relief from forfeiture provisions of the Alberta Insurance Act⁹, and the Judicature Act¹⁰. The judge concluded that the plaintiff’s willfully false statements constituted something in excess of the “imperfect compliance” with a contractual condition that is involved in a claim for relief against forfeiture. The court was unable to relieve against forfeiture, and in the circumstances, ought not to do so based on the equities between the parties.

The judge therefore dismissed the plaintiff’s claim with costs. He made a finding that the contract of insurance was vitiated, and declared the policy terminated effective January 1, 1987 by virtue of the plaintiff’s misrepresentations. He granted judgment against the plaintiff for the monthly disability benefits paid, together with premiums that would have fallen due during the waiver of premium period, a total of some $259,000.00.

On the issue of punitive damages, the trial judge held that the plaintiff’s breach of his implied duty of good faith and fair dealing met the Vorvis requirement for an “independent actionable wrong”. In addition, he found that the plaintiff had committed the actionable tort of deceit.

As to the separate question of whether or not the plaintiff’s conduct met the standard that was required in order to justify a punitive award, the court took note of the fact that the plaintiff had embarked on a deliberate course of conduct to misrepresent facts to the insurance company in order to collect disability benefits over a prolonged period of time. The judge noted that if the forfeiture of the claim and return of the monies paid was the only consequence for this behaviour, the plaintiff would be no worse off than he would have been had he been truthful in the first instance, and the objective of deterrence would not have been met.

The judge’s conclusion on the punitive damages question was as follows:

A great deal has been made in the case law, to which this Court was referred, of the fact that insurers vis a vis their insureds are in a superior bargaining position and one which places the insureds in positions of dependency and vulnerability. Equally, insurers must not be looked upon as fair game. It is a two-way street founded upon the principle of utmost good faith arising from the very nature of the contract. Thus, it is appropriate that punitive damages be awarded and I do so in the sum of $20,000.00.

The Andrusiw case was settled after trial, and no appeal was taken from the decision of the Alberta Court of Queen’s Bench.

The Andrusiw decision received a mention in the judgment of the Supreme Court of Canada in Whiten. It has been relied on in two Alberta trial court decisions in which automobile insurers were awarded punitive damages as a consequence of the insured’s fraud in presenting a motor vehicle damage claim¹¹. Nevertheless, there appear to be no other Canadian decisions in which punitive damages have been awarded to an insurer as a result of a claimant’s fraud in a disability case.

What then is the significance of Andrusiw ? Can disability insurance providers expect to rely on this one case to assist them in reducing insurance fraud?¹²

Fortunately, the decision of the Alberta Court of Queen’s Bench in Andrusiw does not stand completely alone. In a series of significant decisions, courts in British Columbia have developed a substantial body of jurisprudence supporting the proposition that significant punitive damage awards are appropriate in cases of insurance fraud generally. Since these cases involve claims against insureds of the Insurance Corporation of British Columbia, which provides motor vehicle coverage to B.C. drivers, they do not deal directly with fraudulent disability claims. Given that British Columbia law in this area is well developed, however, a brief review of these decisions should be instructive¹³.

A. British Columbia Decisions

Most of the B.C. actions involved staged motor vehicle accidents. Some of the fraudulent schemes are fairly sophisticated, and involve large groups of individuals who submit numerous accident benefit claims to I.C.B.C., based on a number of phoney car accidents.

The first of these decisions is Sanghera v. Thind¹⁴, in which the judge at trial awarded punitive damages of $25,000.00 jointly against five defendants who had been involved in claims arising out of a staged motor vehicle accident. On appeal, the B.C. Court of Appeal agreed that the insurance company was entitled to punitive damages, but reduced the overall award from $25,000.00 to $15,000.00. The rationale behind the reduction in the quantum of damages was that it appeared from the reasons of the trial judge that she had based her decision partly on the fact that some of the defendants had given false testimony at trial. According to Southin, J. A., punitive damages can’t be awarded for perjury, and it would be unfair to punish two of the defendants who had not testified at trial for the perjury of the others.

The Court of Appeal did not take exception to the trial judge’s reasons for awarding punitive damages, which were articulated by her as follows:

The plaintiff also claims exemplary or punitive damages and I suggest this is a most appropriate case in which to make such an award. The defendants have committed a fraud on the Insurance Corporation of British Columbia. They have attempted to extract sums of money from an insurance program that is in place for the benefit of all the people of British Columbia. As I said in my original judgment, “nothing can destroy such a scheme more easily and more rapidly than abuse of that system, particularly when it is as artfully attempted as it was at the case at bar.” Not only must this type of claim be discouraged but it must be stopped if the system is to survive.

To the extent that the rationale of Sanghera is dependant on the commission of a fraud against a public corporation, the case is not directly applicable to a punitive damages claim brought by a private insurance company against a disability claimant. Nevertheless, a strong argument can be made that since fraud is a problem that affects the disability insurance industry as a whole, and that since the costs of fraud are passed on to consumers in the form of higher premiums or reduced benefits, fraudulent claims do result in harm to the public.

Subsequent B.C. decisions have made it clear that the fact that the victim was a publically owned corporation is only one factor that must be taken into consideration in determining the quantum of damages to be awarded against the claimant.

I.C.B.C. continued to pursue punitive damage claims against fraudulent motor vehicle claimants quite aggressively through the 1990's, and was successful in recovering awards ranging anywhere from a low of $500 to a high of $100,000 awarded against the “ringleader” of a large, long-term conspiracy, who had utilized his specialized knowledge as a paralegal employed by a Burnaby law firm to recruit as many as sixty individuals to participate in a total of 12 fraudulent accidents¹⁵.

The factors which courts have considered relevant to the assessment of punitive damages in the British Columbia cases were summarized in I.C.B.C. v. Hoang¹⁶

1. Whether or not the defendant’s conduct includes criminal conduct. If so, the amount of punitive damages awarded ought to be consistent with any corresponding criminal penalty. In addition, if the defendant has been charged criminally, this is a factor that should be taken into consideration;

2. As indicated above, whether or not the claims involve fraud on the public or a public corporation funded by taxpayers;

3. Whether the fraudulent acts are planned, organized, and deliberate;

4. The application of any specialized knowledge, such as knowledge of the legal system or the claims process, in furtherance of the fraud;

5. Whether the particular defendant was involved in multiple claims;

6. Whether or not the defendant commenced legal action in pursuit of his fraudulent claim, thereby abusing the process of the court;

7. Whether or not the individual defendant was a ringleader or organizer who recruited other individuals to participate in a series of claims.

Mitigating factors that have been considered by B.C. courts would include the limited financial means of the defendant/claimant, the fact that a defendant might have played a relatively small role in a scheme that was largely implemented by others, or the fact that the individual made a fraudulent statement out of a desire to protect a relative or friend, and was not motivated by personal greed.

By analogy, many of these factors would be applicable to fraudulent claims submitted under disability insurance policies. For example, the use of forged medical certificates or prescription drug receipts would constitute a criminal act in addition to the fraudulent claim itself, and would likely operate as an aggravating factor. Furthermore, a fraudulent disability claimant, such as the plaintiff in Andrusiw, who continues to submit fraudulent claims over an extended period of time, utilizing considerable planning and cunning, would be seen in a much worse light than an individual who was guilty of submitting a single short term claim.

It is also noteworthy that I.C.B.C. has been successful in these cases in collecting damages for the costs of adjusting the fraudulent claims in the first place, together with the costs involved in investigating the claims in order to uncover the fraud and establish it in court. These costs can include internal costs, such as adjuster’s time and management time expended on fraudulent claims. These amounts would fall under the category of compensatory rather than punitive damages, but disability insurers who are considering pursuing fraudulent claimants should keep in mind that these types of costs can be added to the claim and may be proved on the basis of time sheets, or by means of estimates provided by an experienced claims manager¹⁷.

I.C.B.C. has enjoyed even greater success in claiming punitive damages against fraudulent claimants through the jury process. Jury awards have recently reached a high of $4 million¹⁸ .

B. Practical Considerations

The primary practical problems involved in actively pursuing punitive damage claims against fraudulent disability claimants fall into two categories: first, the evidentiary obstacles involved in establishing a case for punitive damages that meets the high threshold required by the Supreme Court of Canada decisions in Vorvis, Hill, and Whiten; and, second, collection problems arising from the fact that fraudulent claimants are by nature dishonest individuals who can be expected to avoid service of legal process, give false testimony, and disguise their assets or attempt to put them beyond the reach of creditors. In addition, in many cases, the fraudulent claimant will simply be impecunious.

It will be rare that a disability insurer will be able to establish fraud using evidence as powerful, consistent, and credible as was available to the insurer in the Andrusiw case. Given that a higher standard of proof is required where fraud is alleged than the usual balance of probabilities, and given the risks involved in raising this allegation in terms of cost penalties should the insurer fail to establish a case for fraud, insurance companies would be well advised to bring forward these claims only when evidence of fraud is quite strong. Insurers must also bear in mind the possibility of a court’s finding that unjustified allegations of fraud constitute grounds for an award of punitive damages against the insurer based on bad faith, or for an adverse costs award.

With respect to collection problems, since so much disability insurance is currently provided by means of group contracts issued to the claimant’s employer, the insurance company will often be able to look to garnishment as a reliable means of collecting on a judgment. Outside of the group insurance context, the insurer would be well advised to obtain a credit check on the claimant prior to initiating any proceedings. Assets and sources of income should be identified, and serious consideration should be given to obtaining an interim mareva injunction in order to secure the fraudulent claimant’s assets before the Statement of Claim is served.

It is to be noted that the Insurance Corporation of British Columbia has an advantage with respect to the collection of judgments, in that legislation in that province prevents individuals from renewing driver’s licences and motor vehicle owner’s certificates, or from obtaining motor vehicle insurance, so long as a judgment in favour of I.C.B.C. is outstanding¹⁹. Private disability insurers are not in a position to avail themselves of any such statutory protection. Nevertheless, in an appropriate case, companies should give serious consideration to pursuing fraudulent claimants, both for the recovery of benefits paid and for punitive damages, if the industry is to be successful in its efforts to reduce the scale of insurance fraud.

PART III AGGRAVATED AND PUNITIVE DAMAGES AWARDED AGAINST A DISABILITY INSURER

A. Aggravated Damages
As indicated above, aggravated damages are intended to compensate the plaintiff for intangible losses resulting from the breach of the disability insurance contract; the most common variety of aggravated damages being damages awarded for the claimant’s mental distress, depression, or anxiety experienced as a consequence of the denial of monthly benefits.

The traditional rule is that damages for mental distress are not recoverable in breach of contract claims, unless special circumstances exist that would make such damages a foreseeable result of the breach of contract from the point of view of the of the contracting parties at the time that the contract was entered into. Following the decision of the B.C. Court of Appeal in Warrington v. Great-West Life²⁰, Canadian Courts have recognized that disability insurance claims fall into a special category in which damages for mental distress are more easily recoverable. In Warrington, the court recognized that one of the purposes of disability insurance is to preserve the insured’s “peace of mind”, in that the financial protection offered by the policy is meant to free the insured from the financial anxiety and concern that is a natural consequence of total disability.

It is unclear whether Warrington stands for the proposition that disability insurance represents an exception to the normal rule restricting the availability of mental distress damages in breach of contract claims. Arguably, the decision in Warrington might simply represent a recognition that in disability insurance, mental distress is typically a foreseeable result of an improper denial of benefits, and as such would be foreseeable from the inception of the contract. Either way, Warrington establishes that mental distress damages are recoverable, so long as the claimant is able to prove that he suffered mental distress as a consequence of the denial of benefits, and not from the disability itself or from some other cause.

Warrington v. Great-West Life dates from 1996. In the immediate aftermath of Warrington, mental distress awards in disability insurance cases were modest, ranging from a low of $8,500 to a high of $20,000²¹. In the last four or five years, the courts have displayed a willingness to grant claimants larger aggravated damage awards where an improper denial of disability benefits has resulted in mental distress.

B. Punitive Damages

Since the decision of the Supreme Court of Canada in Whiten v. Pilot Insurance²², litigation in which insureds claim punitive damages on the basis of an allegation of bad faith has increased substantially. Disability insurance has been no exception to this trend, and punitive damages are now quite commonly claimed in disability insurance cases.

This has had a profound effect on litigation practice in this area. At one time, plaintiff’s counsel took little interest in the way in which the disability claim was handled by the insurer. In fact, it was not unusual for plaintiff’s counsel to waive discovery of a representative of the insurer, in order to get the case to trial more expeditiously and to spare expense. Evidence at trial tended to be limited to the testimony of medical experts from both sides regarding the physical or psychological condition of the insured, supplemented by eye witness evidence as to the impact that the accident or illness had imposed on the claimant’s way of life and ability to earn an income. It was rare for either the insurer or the insured to tender evidence as to how the insurance company came to the decision to deny benefits. If the medical and other evidence established disability, damages would be awarded to compensate the insured for the loss of benefits; if the evidence at trial failed to establish disability, the action would be dismissed. Either way, the question was whether or not the insurance company had arrived at the correct decision on the question of total disability, and the process by which the company reached that conclusion was thought both by counsel and by the courts to be largely irrelevant.

Subsequent to Whiten, however, where punitive damages are claimed on the basis of insurance company bad faith, the courts have shown a willingness to go through the entire claims file, examining each step in the process of adjusting the disability claim for evidence as to bad faith on the part of the insurer. This has added significantly to the length and cost of trials. In addition, it is now common for plaintiff’s counsel to request an examination for discovery of an insurance company representative, and the scope of such discovery has been broadened so as to encompass both the adjustment of the individual plaintiff’s claim, and also the insurance company’s general claims policies and practices in such cases, as well as the company’s finances. Thus the time required for examinations, and the legal costs involved in the discovery stage, have also increased.

Disability insurance policies typically provide a fairly modest monthly benefit. Where punitive damages are claimed, however, the increased length and complexity of discovery and trial often mean that the insurer is faced with legal costs that are out of proportion to the amount of benefits actually at stake. This gives plaintiffs considerable new leverage in settlement negotiations. Whether the Supreme Court of Canada, in its decisions in Vorvis, Hill, and Whiten, intended this result in the disability insurance field is unknown. Often, defence costs loom large in comparison with any punitive damage award that the plaintiff seems likely to recover. In fact, the costs involved in defending the claims process, as opposed to the costs involved in defending the claim itself, can be significant even where the claimant has little evidence upon which to base the punitive damage claim.

The general principles that apply to punitive damage claims are summarized in Part I of this article. Although there is a considerable body of recent case law dealing with punitive and aggravated damage claims in other areas of insurance, such as motor vehicle and property and casualty claims, this article will focus the recent case law involving punitive damages and aggravated damages in disability insurance cases.

C. Recent Disability Insurance Cases

In Clarfield v. Crown Life Insurance Company²³, the insured was a self employed individual who became depressed following a business failure. Although the insurer paid some benefits while the claim was being assessed, it warned the claimant that he could be required to return the benefits later if his claim was disallowed. The evidence indicated that this caused significant stress to the claimant, who was forced to list his home for sale, and was advised by his physician to find a less stressful occupation. The court awarded $75,000 in aggravated damages, stating that this was clearly an appropriate case for mental distress damages as the insured had suffered increased stress and financial pressure arising from the disallowance of his claim by the insurer.

The court also awarded punitive damages of $200,000. The factors that seemed to influence the award of punitive damages were:
1. Although the policy stated that benefits were to be based on the average highest income over a five year period prior to submission of the claim, the insurer based its denial in part on the fact that the insured had no income in the year preceding the date of claim submission;
2. The claim was submitted in September of 1997, but the insurance company’s decision on payment was delayed until January of 1998;
3. The court felt that the insurer failed to assess the claim in a balanced and reasonable manner;
4. The insurer asked the claimant to compromise his claim at a time when the claimant was financially vulnerable.

Lalonde v. London Life Insurance Company²⁴ is a case in which the plaintiff’s claims for punitive and aggravated damages were dismissed, notwithstanding the fact that the plaintiff was successful in establishing his claim for disability benefits. The insured was a flight attendant who was diagnosed with chronic fatigue syndrome. Surveillance, conducted over 17 days during a three year period of time, included observations of the insured shoveling snow, lifting patio stones out of his car, and carrying cases of beer. Medical and other evidence submitted at trial, however, established that the insured was incapable of any prolonged or continuous employment activity. Due to the “waxing and waning” nature of the claimant’s condition, he was not able to engage in full time employment, although he was intermittently able to carry out strenuous tasks for short periods of time.

On the issue of punitive damages, the court took note of the fact that early in the process of evaluating the claim, the insurer was in receipt of conflicting medical evidence as to the extent of disability. This justified the insurer’s decision to retain investigators to carry out surveillance in an attempt to obtain an objective representation of the claimant’s abilities. Although the insurance company at one point sent a letter to the claimant incorrectly stating that medical evidence did not support his diagnosis of chronic fatigue syndrome, the statement in the letter was subsequently retracted with a satisfactory explanation.

Based on the evidence available, the insurer was entitled to assert its position that the claimant did not suffer the limitations he claimed to suffer as a consequence of his medical condition. There was therefore no conduct on the part of the insurer that would justify an award of punitive damages. In addition, the claimant suffered no loss or damage in consequence of the denial of the claim, apart from the lost benefit payments themselves. There was no increase in the intensity of his symptoms, and he did not incur any additional costs. For these reasons, there was no basis for an award of aggravated damages either.

In Fowler v. Maritime Life Assurance Co²⁵. the insured stopped working on receipt of medical advice that his blood pressure was dangerously high. The insurer paid benefits for a little over two years, then discontinued benefits, only to concede at the commencement of trial that the claimant was totally disabled and had provided appropriate proof of loss. The trial proceeded on the issue of aggravated and punitive damages only.

Referring to the precedent established by Clarfield, the court awarded the plaintiff $75,000 in aggravated damages. The claim for punitive damages was dismissed, as it was the view of the court that this substantial award of aggravated damages would be adequate to deter the insurer in the future.

In Asselstine v. Manufacturer’s Life Insurance Company²⁶, the plaintiff was a registered nurse employed by a scientific research clinic at the University of British Columbia. The university had a self-financed long term disability plan, administered by the defendant insurance company.

The plaintiff developed multiple sclerosis, which seems to have prevented her from performing any substantial tasks involved in her employment. Due to a misunderstanding of the advice she received from a specialist, however, the plaintiff concluded that the specialist would not support her claim for total disability, so she continued to come into work. Her near total inability to perform the job appears to have been overlooked by the managers of the clinic, but it was noted by her co-workers, who testified at trial in support of her disability claim. The plaintiff was laid off due to a lack of funding. She failed to submit her disability claim to the insurance company until several months later. The company therefore initially took the position that she was no longer covered, as she was no longer a member of the insured group. In addition, the insurer relied on an opinion from one MS specialist, while disregarding the views of two other specialists, in concluding that medical evidence did not support total disability during the period when the claimant was still employed. This was notwithstanding the fact that the insurance company was in receipt of a letter from one of the claimant’s co-workers describing her inability to perform the job during the relevant period.

At trial, the insurance company took the position that it was entitled to rely on the report of one specialist, because the other two specialists had not begun to treat the plaintiff until some time after the termination of her employment. In addition, the insurance company relied on a report it had obtained from a rehabilitation specialist, which concluded that other positions were available to the plaintiff based on her education, training, medical history, and experience.

It appears from the case report that the adjuster charged with assessing the claim was extremely selective in the information and documents that were forwarded to the rehabilitation specialist. Essentially, documents that supported disability were not forwarded, while documents that indicated the claimant might be able to work were sent to the rehabilitation consultant.

The court concluded that these actions represented a breach of the insurer’s duty of good faith, in that the insurance company had failed to take a balanced approach to the medical evidence:

There are . . . instances where conflicting evidence not in alignment with the interests of the defendants was merely dismissed. This is unacceptable. A duty of good faith and fair dealing requires an even handed evaluation of all evidence before the insurer by the insurer. Just as one cannot cherry pick the information to send to an assessor for a rehabilitation opinion, one cannot choose only to accept certain medical evidence in the face of compelling, conflicting evidence.

The court awarded punitive damages in the amount of $150,000. Taking note of the evidence to the effect that the plaintiff had suffered increased mental, emotional, and financial stress as a result of the rejection of her claim through a lengthy internal appeals process, as well as protracted litigation, all at a time when the claimant was vulnerable and weak on account of her MS, the court considered an award of $35,000 in aggravated damages to be reasonable.

It is interesting to note that the trial court in Asselstine seems to have made no distinction between the liability of the insurance company, which processed the claim, and the university, which seems to have played a passive role in the claims process, and awarded punitive and aggravated damages against both defendants. Where a disability plan is funded by the employer, but administered by an insurance company, it is open to the employer to argue that it is not responsible for any malicious, high handed, oppressive, or otherwise improper conduct of the insurance company, as this kind of conduct would not be authorized by the disability plan administration agreement. On the other hand, the insurance company would be in a position to argue that its only role in this situation is that of agent for its principal, the employer, and that all liability therefore flows through to the employer. In the Court of Appeal, the trial judgment was varied, and the insurance company was held to have no liability.

The decision in Asselstine is somewhat at odds with the decision of the same court in Nicholas v. Metropolitan Life Insurance Company of Canada²⁷. In Nicholas, the insured was a medical lab technologist. Her union operated a long term disability plan, by means of a trust administered by a board of trustees. The plaintiff developed the view that she was totally disabled as a result of a variety of symptoms that she attributed to “electromagnetic sensitivity” resulting from exposure to flourescent lights in her work place. Her view was described as delusional in an early psychiatric report. Subsequently, however, she obtained opinions from two other specialists, indicating that she suffered from depression and chronic fatigue syndrome. One of these specialists reported that symptoms of sensitivity to electromagnetic frequencies similar to the plaintiff’s symptoms had been documented in a small minority of similar cases. Although the court stated that the adjuster’s decision to reject the recent opinions of the two doctors, in favour of an out of date psychiatric assessment, was unsustainable, this was held to be insufficient to justify an award of punitive damages.

The court took note of Warrington and other case law providing the court with authority to award aggravated damages for breach of a disability insurance policy, but stated that there was no authority for awarding aggravated damages arising out of a claim for long term disability as against a trust fund²⁸. Although the court acknowledged that the Plaintiff had suffered some stress as a result of a denial of her claim, it took note of the fact that she had managed financially, had been able to hold onto her house and avoid welfare, and that the mental distress she suffered was primarily generated by delay, much of which was due to the actions of the plaintiff herself. The claims for aggravated and punitive damages were therefore both dismissed, notwithstanding that the plaintiff was held to be entitled to disability benefits.

In Gerber v. Telus Corp.²⁹, the disability income plan was funded by the employer and administrated by trustees. The plaintiff claimed to be totally disabled as a result of chronic fatigue syndrome. The trustees did not review claims material and medical reports themselves, but rather retained a medical doctor as an advisor. His role was to review the information available and provide recommendations to the trustees. The trustees would then look at the summaries and recommendations and make their decision.

Although the medical evidence as to whether or not the plaintiff’s condition was totally disabling was somewhat mixed, after reviewing it all, the court was of the opinion that the claimant was unable to work as a result of her chronic fatigue. The trustees’ medical advisor was somewhat skeptical regarding the plaintiff’s condition, describing chronic fatigue syndrome “not as a diagnosis, but as a collection of symptoms”. In his memoranda to the trustees, he described one of the plaintiff’s consulting specialist as “a specialist renowned for placing people off work permanently”. He also quoted selectively from the report of another specialist, and continually emphasized references in the specialists’ reports describing chronic fatigue syndrome as being a diagnosis based on “self report”. He failed to mention that the treating specialists found the claimant’s description of her symptoms to be totally credible.

The plaintiff claimed bad faith, on the basis of lack of balance and incompleteness of the medical consultant’s reports to the trustees, together with the fact that the trustees had chosen to deny benefits without first obtaining their own medical examination. The plaintiff further alleged that at the time the benefits were discontinued, the defendant had been insensitive in sending a letter to the plaintiff instructing her to report to work full time in four days. The plaintiff was also critical of the role played by the employer’s ombudsperson in the matter. The ombudsperson had met with the plaintiff to discuss her situation, on a confidential basis, and had then disclosed the facts obtained at the meeting to the employer, and even swore an affidavit on a motion for judgment brought at an earlier stage in the proceedings. An affidavit filed by another officer of the employer on the motion contained an allegation regarding the medical evidence which the affiant later admitted was false.
Although the trial judge was highly critical of the ombudsperson and of the medical consultant, he concluded that the facts were insufficient to merit an award of punitive damages:

When I look at the conduct of the defendants I am not persuaded that it is so egregious as to justify a finding of bad faith. I have earlier described the court’s concerns with the evidence of the ombudsperson and the Affidavit of Mr. Pelechaty. I do not view the conduct as planned, deliberate or as an intention to harm Ms. Gerber. It was however very poor judgment on the part of Telus to have its trustee swear a false Affidavit and to require Ms. Murray [the ombudsperson] to testify regarding her observations of Ms. Gerber.

The conduct of Telus leading up to the termination of Ms. Gerber’s benefits is disturbing, and goes some measure to constituting bad faith. However, I am unable to conclude that [the medical consultant] Dr. Adams’ actions were malicious. He testified that he did not see Ms. Gerber’s credibility as an issue and therefore did not include the relevant references [to her credibility from the specialists’ reports]. This may have been an admission or very poor judgment but it does not quite warrant an award of punitive damages.

The Judge did conclude, however, that the conduct of the employer leading up to the termination, and in particular the letter telling her to return to work on four days notice, warranted an award of aggravated damages. On receipt of the notice of termination, the plaintiff’s health had deteriorated. The medical consultant acknowledged that he knew that the notice would have this affect on her. In addition, the employer was continually challenging the claimant’s credibility, notwithstanding contrary evidence from medical practitioners who had spent significant periods of time with her. In fact, two of these specialists were selected by Telus to perform independent medical examinations. Putting all this together, the court concluded that $20,000 in aggravated damages was appropriate.
The conclusion of the trial judge was upheld in very brief reasons provided by the Alberta Court of Appeal in March of 2004³⁰. On appeal, relying on Wallace v. United Grain Growers Ltd.³¹, the employer argued that no claim lies for aggravated damages in the absence of a separate, actionable wrong. The employer acknowledged that under Warrington, disability insurance policies are “peace of mind” contracts, such that mental distress damages are available. The employer’s argument, however, was that the Telus disability plan was not disability insurance, but rather a part of the employment contract. Therefore, relying on Wallace, it was the employer’s position that there could be no recovery for aggravated damages unless the plaintiff was able to establish a separate actionable wrong.

The Court of Appeal simply stated that while the disability plan was a benefit of the employment contract, it was proper to characterize it as a contract of insurance. That being the case, the Court of Appeal concluded that the contract was a “peace of mind” contract, and that aggravated damages were available even in the absence of an independent actionable wrong³².

In Fidler v. Sun Life Assurance Company of Canada³³, the plaintiff went on long term disability in 1993 as a result of an acute kidney infection leading to chronic fatigue syndrome and fibromyalgia. The insurance company conducted videotape surveillance in 1996, which showed the plaintiff driving, getting in and out of her vehicle, doing some light shopping, walking short distances, and interacting with others. These activities were not inconsistent with the plaintiff’s own description of her day to day activities, as reported to the insurance company in claimant’s statements, nor were they inconsistent with the plaintiff’s abilities as described in medical reports that the insurance company received. Nevertheless, in an internal memo, an adjuster stated that the video investigation showed that the plaintiff was “active for 5 FULL DAYS!”. On cross-examination at trial, a representative of the insurers’ disability management unit agreed that this comment exaggerated the actual results of the surveillance.

In May of 1997, some nine months after the surveillance was completed, the defendant discontinued benefits, advising the plaintiff in a letter that a “non-medical investigation” showed that her activities were incompatable with her alleged disability.

Some of the insurer’s internal memoranda, put into evidence at trial, showed that the insurer then decided to request an I.M.E., on the grounds that the company would look bad if the case came to trial without first obtaining an independent medical. Nevertheless, it took the insurer nearly a year to actually schedule the independent examination.

Although the report of the insurance company’s physician confirmed the plaintiff’s diagnosis and recommended a graduated return to work program, the insurer neither restored benefits nor made any efforts to follow up regarding the suggested graduated return to work.

After an examination for discovery of the plaintiff conducted one week prior to the commencement of trial, the insurer decided that the plaintiff would be found to be totally disabled, and re-instated her benefits. The trial therefore proceeded on the questions of aggravated and punitive damages only.

Although the plaintiff could present no evidence of financial hardship, above and beyond the denial of the benefits themselves, the trial judge concluded that she was entitled to $20,000 in aggravated damages based largely on her own evidence regarding the mental anxiety and stress that she had suffered. This evidence was backed up in comments in one of her doctor’s medical reports. The trial judge denied the request for punitive damages, saying the company could not be faulted because the plaintiff’s diagnosis was largely based on subjective reports and was therefore difficult to confirm. The insurance company, in the view of the trial judge, was therefore entitled to be skeptical regarding the plaintiff’s claim, and for that reason, punitive damages would not be in order.

This decision was varied by the British Columbia Court of Appeal. On the issue of aggravated damages, the majority in the Court of Appeal stated as follows:

Accordingly, aggravated damages are available as additional compensation if the insured establishes that a breach of that contract caused her mental distress. There must be actual evidence of aggravation and mental distress, however, no independent, extra contractual actionable wrong need be proven for such damages to be awarded. Nor is the nature of the insurer’s conduct, other than the fact of breach, material since the purpose of such damages is compensatory and not punitive . . . .

The Court of Appeal agreed with the trial judge that the financial impact of the wrongful termination of benefits was only one factor to be considered when assessing the quantum of aggravated damages. Thus the $20,000 in aggravated damages was reasonable in view of the evidence of mental stress and anxiety, even in the absence of any evidence of unusual financial hardship.

On the issue of punitive damages, the Court of Appeal granted the plaintiff’s appeal, and awarded $100,000 in exemplary damages. The factors that the Court of Appeal believed justified such an award were as follows:

1. The contract was of a type recognized as providing “peace of mind”;
2. It was a contract between parties of marketedly different financial power, and the plaintiff was in a position of vulnerability and reliance;
3. Benefits had been terminated with no notice, and with no new medical evidence to justify that decision;
4. The insurer maintained the denial of benefits for a period of over five years, capitulating only on the eve of trial, although there was no evidence of any change in the plaintiff’s condition at that time;
5. Although the insurer was justified in undertaking video surveillance, it had internally exaggerated the extent of the evidence, and misrepresented the results of the surveillance in correspondence with the plaintiff;
6. The insurer failed to disclose details to the plaintiff as to which of her activities were inconsistent with her alleged disability, and refused to agree to her request to make the video tapes available to her;
7. This impaired her ability to appeal the insurer’s decision to terminate benefits, and was thought to be inconsistent with the obligation to treat a claimant fairly;
8. The insurer seems to have requested the I.M.E. for purposes of “damage control” primarily, and failed to take any action on the recommendations of its own I.M.E. doctor;
9. Although the insurer’s conduct did not display any malice, it was high-handed, and failed to display the fairness and balance that is required by the insurer’s duty of good faith.

In determining the quantum of punitive damages to be awarded, the Court of Appeal recognized that the insurer’s decision to reinstate benefits, although late in the day, was a mitigating factor.

One of the three justices hearing the Fidler appeal dissented on the issue of punitive damages. The Supreme Court of Canada has granted leave to appeal, without reasons, and the decision of the Supreme Court on both aggravated and punitive damages is certain to be of great interest to the industry.

D. Practical Tips for Avoiding an Award of Aggravated or Punitive Damages

1. It is dangerous for an insurer to deny a claim on the basis that the claimant is not disabled, unless:

a. All of the reports of the claimant’s own treating physicians support that conclusion; or

b. The insurer has at least one I.M.E. report, from an appropriate specialist who has actually examined the plaintiff, clearly stating the opinion that the claimant is not disabled;

2. It is unsafe for an insurer to deny a claim on the basis of surveillance evidence alone, as the claimant can often explain it away, and courts tend to give the claimant the benefit of the doubt and therefore discount this type of evidence;³⁴

3. The ultimate decision to deny benefits should always be approved by an experienced claims manager or committee, rather than by a single adjuster;

4. Be sure that everything you do in the claims assessment process, conforms with your company’s written claims procedures;

5. Claims should be processed as expeditiously as reasonably possible, and unless a medical examination can be scheduled within a month or two, insurers should avoid the practice of withholding benefits while in the process of scheduling an I.M.E.;

6. An insurer should always give serious consideration to a recommendation for rehabilitation put forward by any qualified specialist, especially if recommendations for rehabilitation, vocational training, or graduated return to work originate with the insurer’s own doctors;

7. Any correspondence with the claimant or his physicians that refers to policy provisions should either quote the terms, or summarize them accurately;

8. It is especially important to double-check policy wording where a company has different policies in force, with differing terms (i.e., as a result of a merger);

9. Insurers should consider providing several months notice, as a gesture of good faith, prior to terminating benefits;³⁵

10. A denial letter should always invite the claimant to submit further information or medical documents for consideration;

11. On receipt of any such additional evidence from the claimant, the company should always consider it seriously, and document that process in a memo;

12. A denial letter should inform the claimant of any time limits in the policy for the submission of additional evidence of disability, or for the commencement of suit;

13. The insurer should disclose relevant claims information, including a summary of surveillance results, to the claimant on her request, especially in light of the requirements of privacy legislation;

14. Where a claim goes to litigation, the insurer should expect the lawsuit to result in an aggravated damages award, and set reserves accordingly:

a. Where the claimant, in correspondence or otherwise, has advised the insurer of stress, financial problems, potential loss of a home or car, etc; or

b. Where medical reports mention a psychological problem, or psychological overlay to a physical problem;
15. In any internal memos, notes in the claims file, or logs, please avoid making any negative comments on the claimant’s personality, manners, or attitude, as this could be taken to indicate bias on the part of the insurance company;

16. When retaining outside consultants, always provide a complete documentary record, and try to avoid the temptation to submit selections from the medical reports and claimant’s statements available in the claims file;

17. Other than to convey information and documents to the ultimate decision maker, the original adjuster on the file should play no role in the insurer’s internal appeal process;

18. Remember that statements made by the claimant, either to the insurer or to the claimants’ physicians, although “subjective” and “self-reporting”, do constitute evidence as far as a court is concerned, and insurers should be careful to take such statements into consideration in the evaluation of the claim;

19. Whether litigation has been commenced or not, the claimant should never be asked to sign a release without the availability of independent legal advice;

20. If the claim goes to litigation, counsel should consider a motion to sever the bad faith or punitive damages claim from the contract claim for payment of disability benefits, prior to examinations for discovery³⁶.

PART IV CAN COSTS BE AWARDED AGAINST A SOLICITOR FOR IMPROPERLY PURSUING A PUNITIVE DAMAGES CLAIM?

The short answer is, yes. We should bear in mind, however, that there is considerable jurisprudence stating that costs are to be awarded against solicitors personally only in extreme or exceptional cases³⁷.

In Chaplin v. Sun Life Assurance Co. of Canada³⁸, the plaintiff’s solicitor put forward a punitive damages claim based on the theory that the insurer had a deliberate strategy of avoiding payment of disability claims, particularly those brought by women suffering from fibromyalgia, and that the insurer had a bonus scheme in place which rewarded adjusters for successfully denying claims.

The primary claim for disability benefits was dismissed at trial because the trial judge found the plaintiff had failed to prove disability³⁹.

As a result of a number of interlocutory motions⁴⁰, the costs issues did not come on for hearing until 3 years after the trial. The court awarded a portion of the trial costs (estimated at $200,000) against the plaintiff’s solicitor personally. These costs pertain to additional trial days attributable to the punitive damages claim. The court held that the plaintiff herself, and not her solicitor, was responsible for costs attributable to the claim under contract for disability benefits.

The trial judge concluded that there was no basis in evidence for the allegations respecting the insurer’s policy of avoiding claims, nor was there evidence of an improper bonus scheme, and that counsel for the plaintiff was aware of these deficiencies prior to trial. Although counsel is entitled to raise such allegations in pleadings and explore them by means of discovery, it is incumbent on counsel to take a hard look at the evidence before bringing such allegations to trial. An insurer is entitled to defend vigorously any allegation impugning its ethics and corporate responsibility, and competent plaintiffs’ counsel would know that litigating these kinds of issues will add significantly to the length of the trial.

The main ground for imposing costs on plaintiff’s counsel, however, was his failure to obtain fully informed instructions from the plaintiff to pursue the punitive damages claim:

The evidence supports the view that the solicitor Pierce “hijacked” the plaintiff’s action and without authorization promoted what he perceived as an enormous potential award of punitive damages for his own benefit as a stakeholder through his contingency fee. He was on a frolic of his own.

In my view Solicitor Pierce did not properly advise Mrs. Chaplin of the very significant cost penalty she would incur if his . . . allegations failed. In fact, he hid the risk from her. On inquiry as to costs he repeatedly told her not to worry about them. He told her the action was good for amulti-million dollar award.

The Court of Appeal refused the solicitor’s applications for leave to appeal this decision, as it was within the broad discretion of the trial judge to deal with issues of costs.

Given the unusual fact situation in Chaplin, it is unlikely to lead to a large number of cases in which costs are awarded against solicitors personally.

* The author would like to express his gratitude to Amos Comeau, Student-at-Law, for his research assistance⁴.

1. [1989] 1 S.C.R. 1085

2. (1995), 126 D.L.R. (4th )129

3. [2002] 1 S.C.R. 595

4. In Warrington v. Great-West Life Assurance Company (1996), 39 C.C.L.I. (2nd) 116, additional reasons at (1996), 39 C.C.L.I. (2nd) 116n (B.C.C.A.), it was recognized that the purpose of disability insurance is to preserve the claimant’s “peace of mind”, thus freeing her from the financial anxiety that would naturally ensue upon her total disability. It is for this reason that a disability insurance policy is one of the few contracts in which mental distress damages are recoverable, so long as the claimant can establish that her mental distress arises from the insurer’s breach of contract, and not from disability itself or some other cause.

5. Hill v. Church of Scientology of Toronto, above, note 2.

6. Vorvis v. Insurance Company of British Columbia, above, note 1; Whiten v. Pilot Insurance Co., above, note 3.

7. (2001), 33 C.C.L.I. (3d) 238; [2002] I.L.R. 1-4062 (Alta. Q.B.).

8. [1950] 2 All ER 458 at page 459.

9. R.S.A. 1980 chapter I.5, section 385

10. R.S.A. 1980 chapter J-1, section 10

11. Al-Asadi v. Alberta Motor Association Insurance Company (2003), 48 C.C.L.I. (3rd) 284 (Alta. Q.B.); Haiduc v. Alberta Motor Association Insurance Company, (2003), 47 C.C.L.I. (3rd) 104 (Alta. Prov. Crt.).

12. Although statistics on the extent of disability insurance fraud per se are hard to come by it has been estimated that 15 percent of personal injury claims are fraudulent: Owen Lippert, Time to Take Insurance Fraud Seriously, Canadian Lawyer, January 2003 issue.

13. A detailed review of the British Columbia decisions may be found in an article co-authoured by Richard Hayles and Yasmin Visram: “Punitive Damages for Insurance Fraud”, Canadian Journal of Insurance Law, March, 2005.

14. (1989), 41 C.C.L.I. 69 (B.C.S.C.), varied (1991), 49 C.C.L.I. 169 (B.C.C.A.)

15. The “ringleader” case is I.C.B.C. v. Le (1997), 11 C.C.L.I. (3rd) 40 (B.C.S.C.). Other noteworthy cases are I.C.B.C. v. Sam (1997), 41 C.C.L.I. (2nd) 308 (B.C.S.C.), I.C.B.C. v. Hoang (2002), 42 C.C.L.I. (3rd) 235 (B.C.S.C.), additional reasons at [2003] B.C.J. No. 1743 (B.C. S.C.), I.C.B.C. v. Phung (2003), 3 C.C.L.I. (4th) 83 (B.C.S.C.), supp. reasons at [2003] B.C.J. No. 2434, I.C.B.C. v. Siemens (2003), 6 C.C.L.I. (4th) 112 (B.C.S.C.), I.C.B.C. v. Akers (2003) 3 C.C.L.I. (4th) 76 (B.C.S.C.), and I.C.B.C. v. Sun (2003), 2 C.C.L.I. (4th) 12 (B.C.S.C.).

16. Above, previous note, at page 245.

17. Sanghera v. Thind, above, note 14.

18. Lecture delivered by Frank Potts, Barrister & Solicitor, Canadian Defence Lawyers Conference, May 2005.

19.Insurance (Motor Vehicle) Act, R.S.B.C. 1996, ch. 231, sec. 30.1 (2).

20.Above, note 4.

21.Warrington v. Great-West Life, above, note 4 (the quantum of aggravated damages awarded for mental distress was $10,000), McIsaac v. Sun Life Assurance Co. of Canada (1999), 173 D.L.R. (4th) 649 (B.C.C.A.) ($8,500), Evans v. Crown Life Insurance (1996), 37 C.C.L.I. (2nd) 61 (B.C.S.C.) ($20,000); D.E. v. Unum Life Insurance Company of America (1999), 66 B.C.L.R. (3rd) 1 (C.A.) ($15,000). See also Cross v. Canada Life Assurance Company, (2002), 16 C.C.E.L. (3rd) 310, [2002] I.L.R. 1-4044 (Ont. S.C.J.), in which the insured recovered $29,000 in aggravated damages where the insurer’s delay in making payments under a long term disability policy forced the insured to collapse part of herR.R.S.P.’s and increased her anxiety and distress.

22.Above, note 3.

23.(2000), 50 O.R. (3rd) 696 (S.C.J.)

24.(2001), 33 C.C.L.I. (3rd) 108, [2002] I.L.R. 1-4106 (Ont. S.C.J.)

25.[2002] N.J. No. 217 (Nfld. S.C.)

26.(2003), 17 B.C.L.R. (4th) 107, [2003] I.L.R. 1-4222 (S.C.), additional reasons at (2004), 12 C.C.L.I. (4th) 151, [2004] I.L.R. 1-4311, varied [2005] B.C.J. No. 1152 (C.A.).

27.[2003] B.C.J. No 734, [2004] I.L.R. 1-4248 (B.C. S.C.)

28.See also Ditomaso v. Manufacturer’s Life Insurance Company (2002), 6 C.C.L.I. (4th) 252, [2002] I.L.R. 1-4079 (B.C. S.C.).

29.[2003] 10 W.W.R. 82, (2003), 17 Alta. L.R (4th) at 259 (Q.B.).

30.[2004] 6 W.W.R. 201, (2004), 24 Alta. L.R. (4th) 26 (Alta. C.A.)

31.[1997] 3 S.C.R. 701.

32.The question as to whether or not an independent wrong is a pre-requisite for an award of aggravated damages in disability insurance cases is also an issue in Fidler v. Sun Life Insurance Company of Canada, and may be resolved when that case is decided by the Supreme Court of Canada. Leave to appeal in Fidler was granted on January 20, 2005, without reasons, but the decision on the appeal has yet to appear: [2004] S.C.C.A. No. 335 (S.C.C.)

33.[2002] 11 W.W.R. 352, (2002), 42 C.C.L.I. (3rd) 272 (B.C.S.C.), additional reasons at [2003] 10 W.W.R. 686 (S.C.), varied [2004] 8 W.W.R. 193, (2004), 13 C.C.L.I. (4th) 25 (C.A.), leave to appeal to the S.C.C. granted [2004] S.C.C.A. No. 335.

34.This does not mean that surveillance evidence is of no value. It’s primary use, however, is either to discredit the plaintiff by catching him in a falsehood during cross-examination, or as a means of corroborating other evidence, such as medical reports.

35.It is important, however, in making any such payment, to state clearly in a covering letter that the payment is made as a good faith gesture in order to assist the insured, and does not constitute an admission of liability.

36.An order for severance of the bad faith claim is more easily obtained in some provinces than it is in others: Cf. Stevens v. Sun Life Assurance Company of Canada, [2004] I.L.R. 1-4291 (B.C.S.C.) with Lundrigan v. Non-Marine Underwriters, Lloyds of London (2002), 36 C.C.L.I. (3rd) 263 (Nfld. S.C.T.D.), and Sempecos v. State Farm Fire and Casualty Co. (2001), 17 C.P.C. (5th) 371 (Ont. S.C.J.), affirmed [2002] O.J. No. 4498 (Div. Crt.), affirmed [2003] O.J. No. 2886 (C.A.).

37.Young v. Young (1993), 108 D.L.R. (4th) 193.

38.(2004), 7 C.C.L.I. (4th) 277, (2004), 1 C.P.C. (6th) 271 (B.C. S.C.), leave to appeal refused. [2004] B.C.J. No. 1310 (C.A., in Chambers), further application for leave dismissed [2004] B.C.J. No. 2728 (C.A.)