Many employees are covered by group disability policies, as discussed in a prior post.

It can be devastating to be denied coverage by the insurer and then faced with a request from the employer to return to work. The employee may well be in a difficult position as to what course of action to take. It is also important to understand the duty upon the insurer, or even the employer for short term disability claims, or within the context of ‘administrative services only’ (ASO) insurance plans. In these plans, which do not constitute true insurance coverage, the employer takes on payment of the claim but the adjudication of the claim is made by an insurer acting ostensibly independently.

Peace of Mind

Insurance contracts are said to be contracts of “peace of mind”. For that reason, when an insurer denies liability, it must be very careful to have appropriate reasons to take this position. The insurer is required to act “promptly and fairly” throughout the process.

When the insurance company fails in this obligation, additional compensatory damages may be awarded and they may be significant. This is over and above the claim for arrears of disability. The test is not as onerous as the test for aggravated damages in an employment case for the failure to act in good faith at the time of termination. This concept became a part of the common law in the Fidler case referenced below.

Before Fidler

Before Fidler, now the leading decision on this subject, one case awarded $200,000 in punitive damages, which remains rare, and a further $75,000 due to the unfair denial of the claim and in the delay in processing the claim. The law at the time required an “independently actionable wrong”.

Fidler v. Sun Life Assurance Co.

In Fidler, the Supreme Court of Canada upheld an award of aggravated damages due to the unfair denial of the plaintiff’s claim. This case established the “peace of mind” concept and the standard expected of the insurer in adjudicating and processing disability claims.

The insurer’s duty of good faith is now a firmly entrenched principle following this decision. The duty of good faith is not limited simply to the denial of the claim. It extends throughout all aspects of the manner in which the claim is handled by the insurer.

One week prior to trial, the insurer agreed to pay the arrears and to reinstate benefits. The trial continued only on the issues of aggravated and punitive damages.

The trial judge awarded $20,000 for “aggravated damages”, holding that such a claim is permissible given a “peace of mind” contract. The Court of Appeal upheld this award and also awarded the plaintiff punitive damages in the sum of $100,000. The nomenclature of damage awards of this genre is important, as noted later by the Supreme Court of Canada.

The Supreme Court agreed that damages for mental distress, this term being used specifically to distinguish the award from aggravated damages, may be recoverable in Canada for contracts that promise pleasure, relaxation or peace of mind. Such awards, the court stated, follow the general rule of compensatory damages, rather than as an exception to this principle. This is the case as damages for mental distress are seen as being reasonably foreseeable. The end result was that the award of $20,000 was upheld but not the punitive damage award.

Following Fidler, although there are exceptions, the awards for mental suffering tend to cluster in the range of $25,000 to $35,000. The notable distinction is an award of $90,000 allowed by the Nova Scotia Court of Appeal.

A decision of the Ontario Superior Court soon followed in early 2007, allowing the sum of $30,000 due to the incremental mental suffering caused by the insurer’s default. The plaintiff sought to obtain a higher sum to include damages suffered due to the requirement to cash his RRSP and the sale of his home, both of which were denied.

Punitive damage awards have taken on a new life on this subject. Awards of $200,000, $500,000 and $175,000 have been made recently, these both being set in two appellate decisions.

These awards of mental distress and punitive awards, particularly following Fidler in 2007 have very much changed the judicial landscape in favour of fair and prompt administration of disability claims which are clearly a necessity of economic survival when called upon.

Employers who administer disability coverage on an “ASO” basis must also take care as they may be held liable for such claims when acting in concert with the claims assessor or the “insurer”.

Take Away

Employers and employees alike should be aware of the responsibility of the insurer in administering and processing disability claims. These cases have become an important aspect of employment law. Caution must be taken by the employer and the employee must be aware of their rights.

Get Advice Before You Act

Disability insurance claims present difficult and complex issues from both sides. If you have questions about this issue or any employment issue, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins LLP. We regularly advise employees and employers on issues in the workplace. Contact us online or by phone at 416 364 9599 to schedule a consultation.