The high cost of bad faith

Highlighting the folly of denying a claim on slim evidence

By Matthew Pearn January 16 2015 issue
 
Two recent, expensive bad-faith awards should serve as a reminder to long-term disability insurers of the boundary line between fair and foul play. When defending against an insured’s civil claim for insurance benefits, using sparse evidence to deny a claim or applying financially punishing tactics to pressure an insured into settlement will in all likelihood violate the insurer’s duty of good faith. Even the insurer’s tactics during the trial may prove to be the basis of a pricey bad-faith award.

In Ontario, the recent ruling of Fernandes v. Penncorp Life Insurance Co. [2014] O.J. No. 4039, speaks to the risk of an insurer developing tunnel vision, ignoring an abundance of medical evidence supporting the total disability of an insured in favour of slight surveillance evidence counseling against it.

In 2004, Avelino Fernandes owned a bricklaying business and was injured after he fell from scaffolding. After his injury, Fernandes began receiving disability benefits from his long-term disability insurer. Fernandes’ doctor and his insurer provided the same medical opinion: he would not return to work.

Fernandes’ insurer then conducted three days of surveillance on him in August 2005. During that time, Fernandes was observed shoveling dirt and using a wheelbarrow in his backyard for approximately 90 minutes. After reviewing this surveillance, the insurer immediately discontinued benefits despite having medical evidence that Fernandes was completely disabled. However, it did not inform Fernandes of this decision until much later.

Fernandes attempted an unsuccessful return to work. He provided a description of the heavy duties related to his work which went unconsidered by his insurer. He continued to attend requested medical examinations. However, his insurer refused to reinstate benefits.

Fernandes eventually sued his insurer. His insurer renewed benefit payments in 2011, but refused to acknowledge his entitlement during the six-year lapse.

At trial, the court found that the August 2005 surveillance of Fernandes did not establish that he was able to work. Instead, the trial judge stated that there was never any doubt that Fernandes was disabled from performing the important daily duties of a bricklayer. In addition to damages for breach of contract and mental distress, the trial judge awarded $200,000 in punitive damages.

The punitive damages award was upheld on appeal. The insurer failed to carry out a good-faith investigation into Fernandes’ entitlement. It denied benefits without properly considering the duties of a bricklayer, without any medical evidence to support its position, and had persisted in the correctness of its decision despite renewing benefits.

Meanwhile in Nova Scotia, the decision of Industrial Alliance Insurance and Financial Services Inc. v. Brine [2014] N.S.J. No. 328, sets out a laundry list of acts carried out by a long-term disability insurer which amounted to unfair treatment of its insured.

Bruce Brine was a police officer. In 1995, Brine was diagnosed with severe depression. He made a claim with his insurer for disability benefits. Brine’s insurer paid benefits and for him to attend a vocational rehabilitation counsellor, something not covered by the policy but done at the discretion of the insurer. He was eventually found to be totally disabled.

In 1998, Brine’s insurer alleged that over a period of years Brine had received undisclosed CPP and other disability benefits retroactive to 1996, resulting in a substantial overpayment. The insurer immediately halted ongoing benefit payments to offset his CPP payments, and also halted Brine’s vocational rehabilitation services without explanation. In 1999, Brine filed for bankruptcy. Once discharged, he claimed that the overpayments relied upon by his insurer to offset his claim were wiped clean. Brine’s insurer disagreed and only resumed benefit payments in 2003.

The disputes brought Brine and his insurer before the courts. At trial, Brine’s insurer was found in the wrong for refusing to acknowledge that Brine’s 1999 bankruptcy wiped clean most of the overpayment, and in any event should have prorated repayment between the date of discovery and Brine’s 65th birthday.

However, the conduct of Brine’s insurer before and at trial was found to violate its duty of good faith for the following reasons:

• Brine was forced to go to the Tax Court of Canada on several occasions because his insurer persisted in wrongly treating his disability benefits as taxable income. The insurer maintained this position up until the date of trial, causing Brine unreasonable financial hardship.
• Cancelling Brine’s vocational rehabilitation services without considering what impact it might have upon Brine was unreasonable.
• The insurer failed to disclose a 2003 medical examination into Brine’s psychiatric health until the week before his trial without providing explanation, which the court interpreted to be an attempt to obtain a better bargaining position.
• At trial, the insurer presented a witness who tried to “paint” Brine as having concealed his application for CPP benefits, despite the insurance file having shown otherwise.

The court ordered Brine’s insurer to credit him with the overpayment equal to the amount expunged by his 1999 bankruptcy, and also awarded Brine damages for the mental distress. In addition, Brine was awarded $150,000 in aggravated damages and $500,000 in punitive damages to reflect the magnitude of the insurer’s breach of its duty of good faith owed to a vulnerable insured suffering from mental illness.

Industrial Alliance Insurance and Fernandes highlight a number of actions which may prompt a trial judge to award mental distress damages as well as pecuniary damages.

Long-term disability insurers should take note that a single piece of surveillance evidence should not justify maintaining a denial of benefits in the face of unchallenged medical evidence demonstrating the insured’s disability. Likewise, trial judges will disapprove of the insurer applying financial pressure and withholding evidence to incentivize an insured to settle.

Matthew Pearn (@PearnMatthew) is an associate lawyer with Foster & Company in Fredericton, N.B., practising in the areas of personal injury and insurance defence.

Source: http://www.lawyersweekly.ca/index.php?section=article&articleid=2294