Benefits - Proof of disability; Multiple policies - Damages - Punitive damages - Aggravated damages; Rights and duties of insurer - Good faith, breach of

Branco v. American Home Assurance Co.

In reasons focusing on the need for deterrence, punitive damages awards of $1,500,000 and $3,000,000 were made against two insurers respectively. The court also awarded aggravated damages of $150,000 and $300,000 against each insurer respectively for breaching the peace of mind contracts.

[2013] S.J. No. 151

2013 SKQB 98

Saskatchewan Court of Queen's Bench

M.D. Acton J.

March 21, 2013

The insured, a resident of Portugal, injured his foot while working as a welder in Kyrgystan. At the time, he was employed by a Kyrgystan company that was a subsidiary of a Saskatchewan company. He did not return to work after March 2000. The insured commenced litigation against the two insurance companies, AIG and Zurich, in October 2001 for unpaid benefits.

AIG initially paid benefits to the insured for work-related injuries equivalent and consistent with the WCB benefits payable in Saskatchewan. However, benefits were terminated in May 2001. A memo from the adjuster indicates these were terminated because she had not received updated reporting from the doctor AIG had referred the insured to. The insured underwent unsuccessful surgery, physiotherapy and rehabilitation treatments in an attempt to return to work. The insured was seen by numerous specialists he was referred to by AIG. The medical reports confirmed the insured’s disability. The specialists did not provide occupational rehabilitation options. AIG still did not pay benefits and demanded that the insured rehabilitate without benefits.

AIG wanted the insured to be retrained as a gardener which was a much lower and unsatisfying job compared to the insured’s prior employment. Further, this was inappropriate as the insured could not work on uneven ground. AIG told the insured he had to find other suitable vocational training or it was going to terminate his workers’ compensation benefits. Counsel for the insured advised AIG that WCB in Saskatchewan would not have required the insured to retrain in these circumstances. AIG treated this as a refusal by the insured to co-operate and terminated benefits again in 2004.

No further benefits were paid by AIG until a few days before trial. On the eve of trial, AIG agreed the insured was entitled to a permanent impairment allowance and independence allowance.

The second insurer, Zurich, provided benefits for employees in the event of non-work related disability with benefits being payable until recovery, death or until the insured reached the age of 65. Zurich did not provide claim forms for the insured to complete until 2003, despite the claim being apparently approved in March of 2002. In April 2003, Zurich agreed that the first 24 months coverage applied but refused to pay benefits and instead made an offer of $62,600 as full settlement with a $9,000 deduction for solicitor-client costs of making an application disputing jurisdiction, despite the court order that the insured be entitled to costs.

Despite the medical reports prepared for Zurich which confirmed the insured's long term disability, Zurich did not accept and make payment of the disability claim until the spring of 2009. Internally, the claims department did not receive any further access to the file until at least the fall of 2008. Communications were through the legal department. The Zurich legal department took no action regarding the claim from April 2003 to April 2007 which was unexplained. An independent audit of the insured's file recommended accepting the claim in late 2007 or early 2008 which was not communicated to the claims department.

The insured and his family were without funds for many years. They were surviving off loans with a total lack of income causing severe mental stress upon the insured. The court made positive remarks about the insured. After his income was cut off, his life drastically declined.

Both insurers were examined for discovery in 2007 where both admitted that they owed the insured money but the insurers still refused to pay. In April 2008, the defendants made a joint settlement offer in the amount of $238,000 in an attempt to settle for a lesser amount than what was owed.

In April 2009 Zurich accepted the insured's claim for disability benefits and reversed its position on recovery of its legal costs. It paid the insured $321,366.50 for disability benefits owing from June 2000 to April 2009, with pre-judgment interest.

At trial, both insurers failed to call witnesses to explain claims made against them. AIG did not call the adjuster. The court noted that the same adjuster had acted in the same manner in a separate case from 2003 where punitive damages of $60,000 were awarded against AIG. Zurich did not call a member of the legal department to explain why no action was taken on this claim from at least 2003 to 2009. Accordingly, the court drew an adverse inference against both insurers.

The court held that both the workers' compensation coverage provided by AIG and the LT disability coverage from Zurich are peace of mind contracts for the purposes of aggravated damages.

With respect to AIG's duty of good faith, the court found AIG terminated benefits without a basis for doing so. It held AIG "discontinued payment of benefits in order to create undue hardship on [the insured] to force him into accepting an extremely low offer of settlement". AIG also breached its duty of good faith in expecting the insured to consider employment at an entry level minimum wage position after being a highly-trained sought after welder. AIG's failure to provide monthly disability benefits to meet the monthly living expenses of a disabled insured and failure to make the payments in a prompt and reasonable manner was a breach of duty of good faith and fair dealing. The insured was awarded aggravated damages and damages for mental distress in the amount of $150,000.

The court held Zurich breached the peace of mind insurance contract by failing to commence payments in a timely manner. The interest paid to the date of payment was not sufficient to compensate for the mental distress caused by the delay. The insured was entitled to $300,000 for aggravated damages and damages for mental distress caused by Zurich's failure to deal fairly with the insured in good faith.

With respect to the claim for punitive damages against AIG, the court referred to the 2003 decision awarding punitive damages of $60,000 against AIG for the actions of the same adjuster as in this case. The court stressed that punitive damages are awarded to act as a deterrent and are correlated to the degree of reprehensible conduct. The court held in this case AIG was aware of the hardship it was inflicting and went on to find that this was "extremely reprehensible conduct". AIG attempted to cover up its misconduct by referring to its own doctor's failure to provide prompt reporting and the insured's non-compliance. AIG knew its actions were wrong. The court held AIG could have profited significantly if the insured had given into the pressure and accepted a low settlement offer. The court awarded punitive damages against AIG in the amount of $1,500,000.

As against Zurich, the court found that Zurich intended to act in this manner for more than ten years. The legal department attempted to cover up its misconduct by not disclosing the information recommending acceptance of the claim to the insured or to the claims department and instead made a low offer of settlement. The court held Zurich was attempting to make significant profits in postponing payments and making low offers of settlement. It was impossible for Zurich to not know the effect on the plaintiff. Accordingly, punitive damages against Zurich were awarded in the amount of $3,000,000. In formulating this figure, the court noted that it would only take six individuals in the world to accept low offers like the one made to the insured before Zurich would profit $500,000 for each insured and recover the amount of the award. The court stated it could not "imagine more protracted and reprehensible behavior" than the behavior of Zurich.

In concluding, the court expressed concerns about the prevalence of insurers acting in this way in dealing with claims given that a prior award of $1,000,000 was not a sufficient deterrent.