When individuals rely on financial support during periods of extended illness or injury, a claim denial can have significant and far-reaching impacts, leaving policyholders stranded in a sea of uncertainty. Disabled insureds continue to find themselves at odds with insurance providers, grappling with denied claims that, in their eyes, are unjustified due to convoluted policy language and stringent eligibility criteria or simply due to a claim being improperly handled.

This blog sheds light on the distressing issue of wrongful denials in light of a recent decision from the Ontario Court of Appeal. It also serves as a warning to long-term disability insurers that they must treat their insureds appropriately during the claims-handling process. Otherwise, they risk being ordered to pay a substantial amount more.

Employee receives short-term disability benefits following stroke

In Baker v. Blue Cross Life Insurance Company of Canada, the respondent (the “insured”) suffered a stroke in October 2013. At the time of the incident, she was 38 years old and was employed as the Director of Food Services, Environmental, and Porter or Transport Services at a hospital. Through her employer, the insured had access to a disability insurance policy through Blue Cross (the “insurer”).

The insured was paid short-term disability benefits until January 2014, when the insurer cut her off. Following an internal appeal, the insurer reinstated her benefits in March 2014. The short-term disability benefits were exhausted after 30 weeks. Therefore, she subsequently commenced a claim for long-term disability benefits from her insurer.

Insurance company denies long-term disability benefits

Under the policy, the insured was required to prove she satisfied the definition of “total disability”. The policy defined “total disability” as “the complete and continuous inability of the Covered Employee to perform the regular duties of his own occupation as a result of illness or injury”. The insured was required to first prove that she was totally disabled to perform her own occupation, which would result in payment of long-term disability benefits for two years. Upon expiry of the two years, she would have to demonstrate she met the definition of “total disability” at “any occupation”, which meant a:

“… state of continuous incapacity, resulting from illness or injury, which wholly prevents the Covered Employee from performing the regular duties of any occupation for which he:

• would earn 60% or more of his Pre-disability Earnings and

• is reasonably qualified, or may so become, by training, education, or experience.”

The insured received long-term disability benefits for two years under the “own occupation” provision. During that time, she had to go through an internal appeal to reinstate her benefits. However, the insurer denied her claim under the “any occupation” provision, and the insured was unsuccessful in obtaining these benefits despite two internal appeals.

Jury returns verdict in favour of insured with $1.5 million in punitive damages against insurance company

After exhausting the insurer’s internal appeal process, the insured commenced legal action against the insurer for her “any occupation” benefits and sought aggravated and punitive damages. Following a 22-day jury trial, the insured was awarded a declaration that she was “totally disabled” under the insurer’s definition, retroactive benefits to the date of trial in the amount of $220,604, aggravated damages of $40,000, and punitive damages in the amount of $1,500,000. The trial judge also awarded full indemnity costs of $1,083,953.50 as a matter of public policy.

Insurance company appeals portion of order; Court of Appeal denounces mishandling of insured’s claim

The insurer appealed the order for punitive damages to the Court of Appeal and sought leave to appeal the costs award. As such, the critical issues before the Court on appeal were:

• Whether the punitive damages award was justified and, if so, whether the award amount was appropriate; and
• Whether the full indemnity costs award was appropriate.

In support of its appeal, the insurer argued that a “contextual and fair reading” of the record showed the insured’s claim was managed in a “balanced and reasonable manner.” However, the Court of Appeal found the evidence presented at trial demonstrated:

“… reckless indifference to its duty to consider the respondent’s claim in good faith and to conduct a good faith investigation, and at worst, a deliberate strategy to wrongfully deny her benefits.”

The Court noted that the insurer was aware that its handling of the insured’s claim would be a “significant” part of the trial. However, it chose to call a witness who was “unable to explain several of the actions of her predecessors on the file.”

Court of Appeal dismisses appeal; punitive damages award necessary to deter similar conduct by insurance companies

Regarding punitive damages, the Court of Appeal noted appellate courts are given a “greater scope and discretion when reviewing jury awards of punitive damages than an ordinary award of damages.” However, the insured must still prove that the punitive damages awarded do “not serve a rational purpose.” In this case, as a consequence of failing to call a relevant witness to counter the evidence at trial, it did not have the evidence to meet its onus on appeal. Furthermore, the Court did not take issue with the quantum of the award that warranted appellate interference and found that “a significant punitive damages award was necessary to deter Blue Cross from conducting themselves in that fashion in the future.”

Ultimately, the Court dismissed the insurer’s appeal. The evidence presented at the original trial raised serious concerns regarding the manner in which several of the insurer’s disability claim examiners and reviewers processed the insured’s file. The Court of Appeal also determined the punitive damages award served a rational purpose. Although the Court granted leave to appeal the costs award, the costs appeal was dismissed by the Court.

Key takeaways for insureds seeking long-term disability benefits

In this significant decision, the Court of Appeal affirmed the largest known punitive damages award rendered in a long-term disability claim matter in Canada. As such, individuals can take comfort in knowing that courts are willing to ensure justice is attained when long-term disability claims are improperly denied.

It also sets a precedent for future cases against insurance companies regarding long-term disability benefit claims and serves as an example to insurance companies across the country that misconduct of an insured’s claim will not be tolerated. In this instance, the Court of Appeal emphasized the severity of the situation and noted that “deterrence is impossible unless the punishment is meaningful.”

Contact Mulqueen Disability Law in Markham for Trusted Representation in Long-Term Disability Litigation

The knowledgeable disability law lawyers at Mulqueen Disability Law regularly advise and assist clients with various short and long-term disability benefit matters, including benefit claims, buyouts, and appeals. If litigation is necessary, our team provides trusted representation for individuals who have had their claims denied.

Located in Markham, Mulqueen Disability Law advocates for disabled clients throughout Ontario. To learn how we can assist you, contact us online or schedule a confidential consultation with a member of our team by phone at 416-900-0368 (or toll-free at 833-363-3LAW [3529]).