Branco v. American Home Assurance Company, 2015 SKCA 71

The Saskatchewan Court of Appeal recently allowed appeals by both Zurich and AIG in a claim advanced by an injured worker, reducing the punitive damages awards made against the insurers from $4.5 million to $675,000.

The plaintiff was a Canadian citizen living in Portugal. He was injured while working for Kumtor, a Saskatchewan mining company, in Kyrgyzstan in 2000. He was insured through two group insurance policies issued to Kumtor. The AIG policy provided workers’ compensation-type benefits and the  Zurich policy provided long-term disability  coverage. The plaintiff applied for benefits and eventually commenced a claim for damages against both insurers.

AIG made intermittent disability payments to the plaintiff for four years, denying or suspending them several times and ultimately terminating benefits in 2004. Under Zurich’s policy, the plaintiff would be entitled to benefits for the first 24 months following his injury if he was incapable of performing his “own occupation” and beyond 24 months if he was incapable of performing “any occupation”. Zurich approved the plaintiff’s claim in 2002, but did not pay the plaintiff any benefits until 2009. Both insurers offered to settle the plaintiff’s claims for benefits for amounts that the trial judge referred to as “ridiculously low.” The plaintiff went without income for several years, had to move back in with his mother, was forced to rely on the financial support of his family, separated from his wife and developed mental health issues.

Trial Decision

At trial, the Court held that both AIG and Zurich breached their obligations to the plaintiff and had acted in bad faith. The trial judge awarded mental distress and aggravated damages for breaching the insurance contracts, and then made the largest punitive damages award in Canadian history, $3 million against Zurich and $1.5 million against AIG. According to the trial judge, the $1 million punitive damages award in Whiten v. PilotInsurance, 2002 SCC 18, previously the highest punitive damages award made against an insurer for a claim of bad faith, was insufficient to “catch the attention of the insurance industry.” Both insurers appealed.

Court of Appeal Decision

The Court of Appeal found that AIG acted improperly in suspending the plaintiff’s benefits knowing that he was incapable of working at his original job, and as a result the plaintiff went approximately

24 months in total without the support that the AIG policy was designed to provide. The Court of Appeal also found that AIG’s offer to settle of $25,000 was an attempt to force the plaintiff to accept an unfairly low settlement of his global claim. This was a serious violation of an insurer’s “most basic obligations.” Despite the fact that significant punitive damages were appropriate, the Court of Appeal reduced the punitive damages award against AIG from $1.5 million to $175,000. This amount was proportionate to the blameworthiness of the defendant, the vulnerability of the plaintiff, the specific harm caused to the plaintiff and the need for deterrence, all factors to be considered in the assessment of punitive damages as set out by the Supreme Court in Whiten.

With respect to Zurich, the Court of Appeal found that Zurich’s administration of the “own occupation” benefits was a “dramatic transgression of the bounds of good faith” warranting an award of punitive damages. Among other things, although Zurich determined that the plaintiff was entitled to 24 months of “own occupation” benefits in 2002, it did not pay those benefits, did not tell the plaintiff his claim had been approved, made an “unconscionable effort” to settle all claims under any kind of policy for about $60,000, and did not actually pay the “own occupation” benefits until 2009, 7 years after approving them.

Despite Zurich’s wrongdoing, the Court of Appeal found that the punitive damages award was so dramatically high that it was “irrational”, was out of line with precedent and should be set aside. The Court of Appeal ultimately reduced the punitive damages award against Zurich from $3 million to $500,000, again taking into account the factors set out in Whiten.

The Court of Appeal also reduced the trial judge’s award of damages for mental distress from $150,000 to $15,000 as against AIG and from $300,000 to $30,000 as against Zurich. Although the plaintiff was entitled to mental distress damages for the manner in which his claims were handled, the award made by the trial judge was “simply too extravagant to be sustained.”

This decision brings awards for punitive damages against insurers in line with the existing case law while recognizing that bad faith on the part of insurers may well result in significant punitive damages awards. The Court of Appeal noted, however, that insurers cannot be held to a standard of perfection, and not every improper denial or suspension of benefits will result in a finding of bad faith.