Significant aggravated and punitive damages were warranted due to the insurer’s breach of the duty of utmost good faith and the effect of that breach on the insured. The insurer breached the duty of utmost good faith where: it failed to fairly assess the need for rehabilitation services; it failed to disclose an IME relevant to the rehabilitation issue until days before trial; it failed to meaningfully address a decision of the Tax Court regarding the taxability of benefits; and the accuracy of one of its witnesses’ testimony wrongly favoured the insurer.

[2014] N.S.J. No. 328

2014 NSSC 219

Nova Scotia Supreme Court

C.A. Bourgeois J.

June 18, 2014

The insured was a police officer who was insured under a long term disability policy. After being fired from his job in 1995, the insured began receiving monthly disability benefits due to severe depression.

At the insurer’s discretion, the insured initially received rehabilitation services (which were not covered under the policy), but these were later withdrawn without explanation.

In 1998, the insurer alleged that the insured had received a number of years’ worth of undisclosed CPP and other benefits, resulting in a $99,506.64 overpayment. The insurer reduced the insured’s monthly disability payments to zero until the amount was repaid. After the insured filed for bankruptcy, the insurer took the position that the alleged overpayment, now amounting to $63,036.81, survived because the original failure to disclose constituted a misappropriation of funds or a defalcation by one acting in a fiduciary capacity. The insured’s benefits were resumed in 2003.

The insurer also issued T4 slips characterizing the insured’s benefits as taxable income from 1995 and on, despite the insured twice winning Tax Court rulings to the opposite effect in 2006 and 2010.

In 2004, the insured won a $300,000 human rights award from his previous employer. The insurer counterclaimed to recoup pursuant to its subrogation right under the policy.

In a 333 paragraph decision, the court found that the insurer was in breach of contract for the unilateral clawback of the disability benefits, rather than pro-rating the rightly claimed overpayment over the life of the policy. Further, the insurer was in breach of its utmost duty of good faith: by failing to consider the impact of discontinuing rehabilitation services once they had been provided; the insurer’s decision to withhold a 2003 IME report relevant to the rehabilitation issue until days before trial; the insurer’s witness’s “wanton” disregard for the accuracy of her testimony at trial; and for the insurer’s failure to meaningfully address the taxable income issue following the 2006 Tax Court decision in favour of the insured. The insurer’s decision to claw back benefits and to continue claiming for the overpayment post-bankruptcy were not breaches of its duty of utmost good faith because the insurer’s decision was reasonable and supported by legal authorities or the policy.

Ultimately, the insured was awarded $62,000 for the overpayment which was expunged by his bankruptcy; $30,000 for mental distress; $150,000 in aggravated damages; and $500,000 in punitive damages. The court held that significant aggravated and punitive damages were warranted given the breadth of the insurer’s good faith breach and its effects on the insured. In the counterclaim, the insurer was successful on the basis that the majority of the $300,000 human rights award was for lost income. The insurer received $210,000 after the insured was afforded a credit for his substantial legal fees relating to the human rights award.