Insurer’s Denial of Claim that Ultimately Succeeds Not Bad Faith: S.C.C.

In a decision that will be of great interest to insurers, the Supreme Court of Canada today struck down a $100,000 award of punitive damages that had been made against a disability insurer. In Fidler v. Sun Life Assurance, the plaintiff had long term disability insurance under a group policy with Sun Life. She was diagnosed with fibromyalgia and chronic pain syndrome. Sun Life paid benefits for several years but in 1997, terminated them. In doing so, it relied on video surveillance of the plaintiff which, it felt, was not consistent with an inability to do any work. There was evidently a significant body of medical evidence though, that indicated that the plaintiff was, in fact, unable to work.

The insured sued Sun Life and one week before the trial was to commence, the insurer offered to reinstate her benefits and to pay all arrears, with interest. The trial proceeded on the issue of damages.

At trial in the British Columbia Supreme Court, the plaintiff received an award of $20,000 but her claim for punitive damages was dismissed. On appeal to the B.C. Court of Appeal, the mental distress award was upheld. The Court of Appeal also added damages of $100,000 in punitive damages, finding that the insurer had acted in bad faith.

Sun Life appealed to the Supreme Court of Canada. In a unanimous decision, released earlier today, the Court upheld the $20,000 award for mental distress but set aside the punitive damages award.

The Court provided a helpful discussion of the circumstances in which damages for mental distress will be awarded in breach of contract cases (where courts have traditionally been reluctant to make such awards). After reviewing the jurisprudence, the Supreme Court concluded that the availability of damages for mental distress, like other contractual damages, will ultimately be determined by the expectations of the parties at the time of making the contract: “The court should ask “what did the contract promise?” and provide compensation for those promises.  The aim of compensatory damages is to restore the wronged party to the position he or she would have been in had the contract not been broken.”

Ordinary commercial contracts, the Court said, will usually not attract damages for mental distress. This is because any mental suffering is usually minimal and is not within the contemplation of the parties at the time of making the contract.

But the Court went on to say that damages for mental distress are more likely to be recoverable in the case of certain types of contracts (referred to in the decision as “peace of mind” contracts):

The matter is otherwise, however, when the parties enter into a contract, an object of which is to secure a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made. The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security.

Sun Life’s disability insurance policy was a “peace of mind” contract, the Court felt, and the trial judge did not err in awarding damages of $20,000 under this head.

Of equal or greater importance to insurers was the finding by the Court,  that mere denial of a claim by an insurer is not bad faith. Thus, denial, without more, does not give rise to an entitlement to punitive damages, even where the insured’s claim ultimately succeeds.

Although the Court said that each case in which bad faith is alleged will require a consideration of the specific facts, it endorsed the following statement of an insurer’s duty, made by Mr. Justice Dennis O’Connor of the Ontario Court of Appeal in 702535 Ontario Inc. v. Lloyd’s London, Non-Marine Underwriters:

The duty of good faith also requires an insurer to deal with its insured’s claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability or to gain bargaining leverage in negotiating a settlement.  A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy. This duty of fairness, however, does not require that an insurer necessarily be correct in making a decision to dispute its obligation to pay a claim. Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.

So in other words, an insurer is permitted to be wrong in its assessment of a claim.


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