The Saskatchewan Court of Appeal recently set aside the largest punitive damages awards ever made against insurers in Canada in Zurich Life Insurance Co. v. Branco. The Court of Appeal decision resulted in a 90% reduction of the $1.5 million award against American Home Assurance Company (AIG).

In Branco, the Court of Appeal conducted a detailed assessment of the facts and reiterated the importance of trial judges considering and analysing the specific terms of an insurance policy and the respective obligations of both the insurer and insured. Trial decisions like Branco that fail to do so and analyze and refer to the underlying policy terms in "only the most general of terms" are vulnerable to being overturned on appellate review. The Court of Appeal also reinforced the applicable legal standard and principles for awarding punitive damages.

Background of the Action

The factual context and history of the claim's handling is long and complex. The following is a brief synopsis. In 2000, Mr. Branco injured his foot while working as a welder at a mine in Kyrgyzstan. He sought coverage from AIG under a group insurance policy that provided workers' compensation-type benefits to injured mine employees mirroring the Saskatchewan workers' compensation regime. AIG did not dispute that Mr. Branco had sustained work related injuries, and paid him some but not all of the benefits he claimed under the policy. However, one of the central issues in dispute was the extent of Mr. Branco's injuries and his ability to be trained for and perform other job functions. AIG ultimately terminated Mr. Branco's benefits in 2004 based on his and his lawyer's failure to cooperate with AIG's 20-month effort to enroll him in vocational rehabilitation, involving 22 written requests for cooperation and 12 warnings by AIG or its counsel. Mr. Branco commenced an action against AIG seeking to recover additional and ongoing benefits he alleged were owed to him and claiming an entitlement to punitive damages.

The Decision of the Trial Judge

The Trial Judge ruled in favour of Mr. Branco and found that AIG was liable to pay him additional past and future benefits under the AIG policy. In the decision, the Trial Judge broadly and briefly referenced the AIG policy as providing workers' compensation type benefits. In his Reasons for Decision, the Trial Judge did not critically examine and analyze the terms of the policy or the legal principles governing workers' compensation insurance coverage. The Trial Judge concluded that AIG breached the policy and acted in bad faith, without making any specific findings of breaches of the workers' compensation policy or specific findings of bad faith conduct. Flowing from the purported finding of bad faith on the part of AIG, the Trial Judge awarded $1.5 million in punitive damages and $150,000 in "exemplary" or mental distress damages against AIG.

The Court of Appeal Decision

AIG appealed the Trial Judge's decision and on appeal argued that the Trial Judge omitted two fundamental analytical steps in concluding that AIG breached its policy and its independent duty of good faith. First, AIG argued that the Trial Judge failed to analyze and interpret the terms of the AIG policy in any meaningful way to determine both parties' obligations pursuant to it. Second, as a consequence of the first error, the Trial Judge failed to properly analyze whether Mr. Branco's refusal to comply with his obligations under the policy - and in particular, to attempt vocational rehabilitation - entitled AIG to suspend his benefits.

Chief Justice Richards, writing for the Saskatchewan Court of Appeal, agreed with AIG's position, stating that "[t]here is a great deal of merit in AIG's submission" regarding the Trial Judge's failure to analyze the terms of the AIG policy and the parties' obligations pursuant to it. His Honour, speaking for the Court, stated:

[77]  The central problem with the trial judge's analysis of AIG's obligations under its policy is that he failed to examine the particulars of the policy itself. Rather, he referred to the policy in only the most general of terms, describing it as being "based upon WCB benefits" and as providing "disability" benefits. Overall, he appears to have proceeded on the basis that, if Mr. Branco was disabled to some extent, he was entitled to benefits. The reality of the AIG policy is considerably more complex than that as it involves obligations imposed on both the insurer and the insured.

The Saskatchewan Court of Appeal carefully examined the policy terms and Mr. Branco's obligations under them. The Court of Appeal agreed with AIG that over the critical 2003-2004 time period, Mr. Branco had failed to comply with AIG's legitimate requests for vocational rehabilitation, and that AIG's subsequent suspension of benefits was authorized and therefore could not be considered an act of bad faith. The Court of Appeal characterized the parties' conduct over this period as follows:

[83] ...as of February of 2003, no medical opinion suggested that Mr. Branco was unable to perform any occupation or that he was not a candidate for re-training. ... Mr. Branco also testified at trial that, in 2003, he believed he could work at any occupation that did not require him to stand or walk for a long time.

[84]  It was against this background that, in April of 2003, AIG proposed a program of vocational rehabilitation-something it was entitled to do pursuant to s. 51.1(b) of the [Workers Compensation] Act. For almost two years, AIG sought Mr. Branco's cooperation in locating a suitable rehabilitation program. Initially, it made arrangements for Mr. Branco to attend the state-funded facility in Lisbon. As noted above, Mr. Branco's lawyer then advised AIG that there were "better and more suitable facilities" closer to Mr. Branco's home. AIG requested that Mr. Branco provide information regarding these more suitable facilities. Notwithstanding repeated requests throughout 2003 and 2004, Mr. Branco's lawyer did not identify any such facility.

[85]  AIG's decision to suspend Mr. Branco's benefits in December of 2004 was the conclusion of a 20-month effort to engage him in a program of vocational rehabilitation. By that point, there had been 22 requests from AIG seeking Mr. Branco's cooperation and 12 warnings, no doubt with s. 104(4)(b)(ii) of the Act in mind, that his benefits might be suspended if he did not cooperate. Mr. Branco confirmed at trial that he had been aware of AIG's standing offer to reinstate benefits if he enrolled in a rehabilitation program.

The Court of Appeal expressly held and stated that the Trial Judge's assessment of AIG's liability with respect to this time period and the vocational assessment was "fundamentally flawed", stating as follows:

[82] In my view, the trial judge's assessment of AIG's liability under its policy was fundamentally flawed because, as noted above, he did not consider the specific terms of the policy when coming to his conclusions and failed to relate the terms of the policy to the facts. When the analysis on this front is conducted properly, it becomes apparent that AIG was entitled to suspend benefits as it did in 2004.

...

[86] Thus, on a plain reading of the Act, AIG was entitled to suspend Mr. Branco's benefits as of December of 2004. He had a duty to cooperate with rehabilitation efforts under s. 51.1(b) and AIG had the authority, under s. 104(4)(b)(ii), to suspend his benefits if he did not. None of this was properly appreciated or considered by the trial judge.

The Court of Appeal concluded that AIG's justification for the ultimate termination of benefits in 2004 was entirely valid given the parties' obligations under the AIG policy. The Court of Appeal found that AIG's denial of benefits was not justifiable in only two isolated periods over the long history of the case. On the issue of damages, the Court of Appeal weighed all the factors fromWhiten v. Pilot Insurance Co. and, based on AIG's much "narrower" breach of the duty of good faith, reduced the punitive damages award from $1.5 million to $175,000 and reduced the "exemplary" damages award from $150,000 to $15,000.