Peace of Mind Contracts: Special Considerations for Wrongful Denial of Long-Term Disability Benefits

Insurance contracts are marketed and purchased for the security they offer the policyholder in the event of a loss. Specifically, with long-term disability policies, the policies are paid for in order to receive income replacement benefits upon being disabled and unable to work.

An employee being denied disability benefits when unable to work can be a devastating loss. Not only is the employee not able to work (and thus not earning income), but without an insurance-approved absence from work, the employee’s job security may also be threatened if an employer demands the employee to return.

Given this interconnectedness, sometimes insurance companies face increased liability when wrongfully denying a long-term disability claim.  The law in this regard comes from both statutes as well as the common law.

It should be noted however that additional damages are rare and not all wrongful denials of an insurance payment will result in additional damages as each case is unique and should be assessed by a lawyer.

What statutory right does one have in this instance?

In Ontario, an insured person has a statutory basis for bringing what is called a “bad faith” claim against their respective insurer. Within insurance law, a bad faith claim is most often brought against an insurer who unreasonably refuses, delays or avoids paying a claim without proper investigation. Section 439 of the Ontario Insurance Act, 1990 R.S.O. c. I. 8 (amended to 2003) states that: “No person shall engage in any unfair or deceptive act or practice.” In conjunction with this, section 438 defines “person,” as an individual, a corporation, a Lloyd’s name, a mutual benefit society or fraternal society. These legislative provisions can be seen as pieces of a larger puzzle that constitute the framework of conduct expected of an insurer/insured relationship.

What does the common law say?

At common law, there are implied obligations imposed upon both parties to the contract to act in “the utmost good faith.” An insurer is therefore required “to act promptly and fairly at every step of the claims process” as stated in the case of Wadhwani v. State Farm Mut. Auto. Ins. Co., 2010 ONSC 2479, 2010 CarswellOnt 3340.

Punitive damages seek to punish intentional, malicious, fraudulent, violent or otherwise outrageous behaviour of a party and discourage further such acts by both the defendant and others. Typically, they are awarded with a breach of the duty of good faith when there is a marked departure from the ordinary standards of decency. For instance in Vorvis v Insurance Corporation of British Columbia, 1989 CanLII 93 (SCC), Canada’s highest Court recognized the punitive damages require an actionable wrong outside of merely the obligation to pay the claim. Instead a breach of the distinct duty to act in good faith would be an independent actional wrong warranting punitive damages.

In a particularly egregious example, in Whiten v Pilot Insurance Co., [2002] 1 S.C.R. 595, 2002 SCC 18 (“Whiten”) substantial punitive damages in the amount of $1 million were awarded against an insurance company when the insurance company denied payment of claim when the insured’s house burned in a fire. The insurance company denied the claim suspecting arson because the insureds were not working at the time of the fire, despite numerous authorities indicating there was no arson. The Court found the insurance company withheld the amounts under the claim in an attempt to obtain a lower settlement.

On the other hand, aggravated damages are compensatory in nature. Generally, these damages are awarded when a defendant deliberately subjects the plaintiff to humiliating and malicious circumstances. Such damages are additional compensation that try to correct the effect of the defendant’s tortious conduct – in other words, aggravated damages seek to put the plaintiff in the position that he/she would have been in, had the tort never happened. However in the context of long-term disability insurance (and insurance contracts in general), since such contracts are characterized as ‘peace of mind’ contracts, mental distress damages can arise out of the breach of contract itself, free of an independent wrong or a specific aggravating circumstance. In other words, there is not always a need to prove the insurer’s conduct was outrageous.

For instance, in Fidler v Sun Life Assurance Company of Canada, 2006 SCC 30, the Supreme Court of Canada upheld the trial judge’s finding that there was no breach of the duty of good faith and thus punitive damage were not appropriate. That said, the Court upheld the trial judge’s decision to award aggravated damages upon ample evidence that the plaintiff suffered stress and anxiety due to the wrongful denial of disability benefits, despite no independent breach outside of not paying the claim.

Clarfield v Crown Life Insurance Company, (2000), 50 OR (3d) 696 (SCJ) offers an example where both punitive and aggravated damages were awarded based on the denial of disability benefits (however it pre-dates the Filder decision above). The Court awarded $200,000 in punitive damages as well as $75,000 in aggravated damages. For punitive damages the Court found that the adjudication of the claim for disability benefits was not made on a timely basis despite ample medical evidence demonstrating a disability, the insurance company negotiated unfairly with a disabled person and that there was a pattern of conduct of denying these types of claims with other insureds. As for aggravated damages, the Court found the insured experienced increased mental distress not only due to the denial of the claim but the delay in the insurance company adjudicating it.

When an insurance company denies an employee payment of long-term disability benefits, it impacts not only the employee’s immediate financial reality but can also affect their future financial circumstance by putting their job in jeopardy. If faced with this situation, it is important to consult a lawyer who can advise you on both the disability insurance aspect as well as the associated workplace issues.

Monkhouse Law practises both disability and employment law. We offer a free 30 minute consultation.

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