F
worked as a bank receptionist and was covered by a group policy
that included long-term disability benefits. At the age of 36, she
became ill, was eventually diagnosed with chronic fatigue syndrome
and fibromyalgia, and began receiving long-term disability benefits
in January 1991. Under the terms of the policy, she was only entitled
to continued benefits after two years if she was unable to do any
job. In May 1997, the insurer informed F that her benefit payments
would be terminated. According to the insurer, its video surveillance
detailed activities inconsistent with F’s claim that she was
incapable of performing light or sedentary work. The insurer’s
denial of benefits was followed by almost two years of correspondence
with F and medical professionals. Despite the medical evidence in
its possession to the effect that F was not yet capable of doing
any work, the insurer, relying on its own consultants and experts,
confirmed its decision to terminate benefits in December 1998. F
commenced an action and, one week before the trial was scheduled
to start, the insurer offered to reinstate her benefits and to pay
all arrears with interest. As a result, the only issue at trial
was F’s entitlement to damages. The trial judge awarded her
$20,000 in aggravated damages for mental distress but, concluding
that the insurer had not acted in bad faith, dismissed her claim
for punitive damages. The Court of Appeal unanimously upheld the
award for mental distress, and a majority of the court awarded F
an additional $100,000 in punitive damages, finding palpable and
overriding error on the question of bad faith.
Held: The appeal should be allowed in part.
Damages for mental distress for breach of contract may be recovered
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. There is no requirement for an independent actionable
wrong. In order to be successful, a plaintiff must prove his or
her loss and the court must be satisfied that the degree of mental
suffering caused by the breach was of a degree sufficient to warrant
compensation. These questions require sensitivity to the particular
facts of each case. Here, given the nature of a disability insurance
contract, it would have been within the reasonable contemplation
of the parties at the time the contract was made that mental distress
would likely flow from a failure to pay the required benefits. An
unwarranted delay in receiving the bargained for protection can
be extremely stressful. The mental distress at issue here was of
a degree sufficient to warrant compensation. The trial judge concluded,
based on extensive medical evidence documenting the stress and anxiety
that F experienced, that merely paying the arrears and interest
did not compensate for the years that F was without her benefits.
His award of $20,000 seeks to compensate her for the psychological
consequences of the insurer’s breach. [44-45] [47] [56-59]
The
Court of Appeal’s award of punitive damages must be set aside.
Punitive damages are not compensatory. They are designed to address
the purposes of retribution, deterrence and denunciation. However,
an insurer will not necessarily be liable for such damages by incorrectly
denying a claim that is eventually conceded, or judicially determined,
to be legitimate. The question in each case is whether the denial
was the result of the overwhelmingly inadequate handling of the
claim, or the introduction of improper considerations into the claims
process. Ultimately, each case revolves around its own facts. Here,
after a thorough review of the relevant evidence, the trial judge
found that the insurer had not acted in bad faith. He considered
every salient aspect of how the insurer handled the claim and concluded
that its denial of benefits was the product of a real, albeit incorrect,
doubt as to whether F was incapable of performing any work. The
termination of benefits relating to an unobservable disability in
the absence of any medical evidence indicating an ability to return
to work represents conduct that is troubling, but not sufficiently
so as to justify interfering with the trial judge’s conclusion
that there was no bad faith. [61-64] [71-75]
