In a recent decision involving an award of aggravated damages, the Plaintiff commenced a legal action against her disability insurer. The Plaintiff was employed as a receptionist beginning in 1986 until she fell ill in June 1990, at which time she was hospitalized due to an acute kidney infection. She developed chronic fatigue syndrome and fibromyalgia shortly after being discharged from the hospital, which she alleged rendered her totally disabled. According to her insurance policy (the "Policy"), an individual who is unable to perform the essential duties of his or her own job is considered "totally disabled" for the first two years following the onset of a disability. After 2 years, the definition of "totally disabled" pursuant to the Policy changed such that an individual must be unable to perform any occupation for which they are reasonably qualified.
The Plaintiff began receiving long term disability benefits on January 4, 1991. Video surveillance in 1996 showed the Plaintiff getting in and out of her car, driving, shopping, walking, and bending, most of which was inconsistent with her responses in the "Lifestyle Questionnaire" she prepared for her insurer. Following the insurer's review of the surveillance, the Plaintiff's benefits were discontinued.
One week prior to the commencement of the trial, the insurer agreed to pay all long term disability payments owing, with interest. As a result, the only issue left to be determined at trial was the Plaintiff's entitlement to punitive and aggravated damages.
Ralph, J., rendered three significant findings of fact in his trial decision. Firstly, he found that there was no medical evidence contradicting the Plaintiff's claim to total disability. Evidence provided from an Independent Medical Examination (IME) was inconclusive as the report stated that she should participate in a rehabilitation program before a gradual return to work.
The Court found that the IME report, taken in light of the medical information provided by her own physician, was not sufficient to consider her able to work at any job . Secondly, the trial judge found that internal memoranda describing the surveillance video was exaggerated. Furthermore, the Court considered the surveillance to be an invasion of the Plaintiff's privacy. The insurer's internal medical consultants considered the IME and the surveillance evidence and concluded, without having examined or spoken with the Plaintiff, that there was no evidence to support her claim that she could not work. Thirdly, the Plaintiff was found to have "genuinely suffered significant additional distress and discomfort arising out of the loss of the disability coverage."
According to these findings of fact, the trial judge concluded the Plaintiff was entitled to $20,000 in aggravated damages. Ralph, J., accepted the argument that a claim for mental distress in a breach of contract case was available in cases involving contracts for "peace of mind." Long term disability contracts were found to meet that definition.
Having not found bad faith, the trial judge did not award punitive damages. The insurer was not acting in a malicious, oppressive, or high-handed manner although it did at times take an over-zealous approach to refuting the Plaintiff's entitlement to the benefits despite strong medical evidence to the contrary.
B.C. Court of Appeal Decision
The decision of the trial judge was upheld on appeal. However, the majority of the Court felt that this was a proper case for punitive damages and awarded the Plaintiff an additional $100,000.
A finding of bad faith on the part of the insurer was made on the basis that the insurer's behaviour was arbitrary and highhanded. It had made its determination based on non-medical evidence when it had specifically told the insured that it would only consider medical information. The Court concluded the insurer should have acted on the recommendation to provide rehabilitation to facilitate her return to work and that failing to do so was malicious.
Supreme Court of Canada Decision
The Supreme Court of Canada set aside the Court of Appeal's award of $100,000 for punitive damages and upheld the trial judge's decision on aggravated damages. According to the Supreme Court, an independently actionable wrong is not required for an award of aggravated damages. The Court found that the rule in Hadley and Baxendale is sufficient to deal with the circumstances. Aggravated damages can be regarded as an extension of the rule that a plaintiff is to be awarded damages for loss flowing from a breach of contract and for what the parties would reasonably contemplate as flowing from the breach. In circumstances involving contracts for "peace of mind," pleasure, or relaxation, the Court ruled that the possibility of mental distress caused by a denial of benefits was likely in the contemplation of both parties at the time of contract formation. Potential mental distress on breach must be contemplated by the parties when entering into the relationship, however it need not be the dominant aspect of the arrangement.
In the past, Courts employed a "peace of mind" exception to the general rule that damages in contract were restricted to pure economic loss and did not include mental distress. Purely commercial contracts, where a breach may cause incidental anger or frustration, must be contrasted with situations involving contracts where one of the corollary objects is a particular psychological benefit. In the latter circumstance, aggravated damages may be awarded. Bad faith was not found as it requires an independently actionable wrong, not merely misjudgement of the evidence.
Lessons from Fidler
Insurers must now consider mental distress damages when terminating long term disability benefits. The onus remains on the plaintiff to prove that one of the objects of the contract is to secure a psychological benefit and that the level of mental suffering caused by the breach is of such a degree as to warrant compensation.
This case opens the door to the argument that a number of other insurance policies may be considered "peace of mind contracts." For instance, in future cases, plaintiff's counsel may argue that fire insurance contracts fall within that category as one aspect of the contract is the psychological benefit of reassurance of financial security in the face of property destruction. It is conceivable that the denial of payment to an individual whose net worth is completely invested in their property could result in significant distress.
Thankfully, from an insurer's perspective, the Court of Appeal's finding of bad faith was reversed. However, it should be noted that this decision in no way shuts the door on the possibility of an award for punitive damages against an insurer when acting in bad faith. Insurers are permitted to protect their economic interests but must be mindful of the relatively vulnerable position of their insureds.