Discovery in Claims Litigation – Examining the Insurer’s Representation

This paper is not meant to be an academic treatise, but rather a practical guide for how lawyers should approach the examination of insurer representative in LTD litigation. For many plaintiffs’ counsel, LTD lawsuits have been an off-shoot of acting for victims of motor vehicle accidents. However, as the Ontario workforce ages, there is a significant likelihood that the number of workers finding themselves disabled and claiming LTD benefits will increase. The relatively recent elimination of the mandatory retirement age in Ontario may also contribute to this trend. More disgruntled workers will complain of being wrongfully denied long-term disability benefits. It is simple mathematics. More claims will lead to more disputes. It is fair to say, however, that for many plaintiffs’ counsel, LTD litigation remains an adjunct rather than an area of primary practice for their firm. At the risk of stating the obvious, while there are some similarities between motor vehicle and LTD litigation, such as the importance of understanding complex medical disability issues, the two areas of litigation are profoundly different. Lawyers who decide to represent claimants in LTD litigation would be well-served to develop a thorough appreciation of the differences in the two types of litigation as they plan for, and conduct, examinations of insurers’ representatives in disability cases. Unlike motor vehicle litigation, which is primarily driven by tort and statutory interpretation considerations, LTD litigation flows from, and is governed by, contract. Concepts like the determination of fault, the calculation of restoration interest, the examination of the reasonable person give way to the tasks of contractual interpretation, and the evaluation of the claims handling processes that flow from the contract itself. This rigid distinction breaks down somewhat when bad faith claims come into play, and I will discuss those separately.

Pre-examination considerations

Given that LTD litigation is based in contract, it is important to realize that there is no government-mandated, universally applied long-term disability policy of insurance. Policies vary from insurer to insurer and from client to client. It is therefore vitally important that you obtain early complete disclosure of both the policy and the claims file.

The scope of benefits offered by an LTD policy are directly related to the premiums paid. The standard policy offers benefits for two years, while the claimant is disabled from his/her own job and then offers benefits until The age of 65, if the claimant is disabled from any occupation for which he/she is qualified by education training or experience (the so called “any occupation” clause).

Depending on the policy, benefits will entail payment of a percentage of the workers’ normal wage (usually varying from 60% to 75%), but benefits may also include additional items like waiver of LTD and life insurance premiums, rehabilitation and retraining assistance and contributions to the workers pension plan. We recommend that you obtain disclosure of the policy as soon as possible to ensure that you are claiming everything that the worker is entitled to under the policy. [1]

Further, obtaining the policy will allow you to calculate the monthly benefit to which your client is entitled. The policy will also set out the test for entitlement. Most policies rely on the “any occupation” test for entitlement after two years, but many policies have interesting variations on the themes; for example, “any occupation” is sometimes defined as an alternative occupation that will pay at least 60% of the claimant’s pre-disability income. Other policies contain appeal procedures and contractual limitation periods that are, in some cases, longer than the statutory limitation periods. A careful examination of the policy at an early stage will often help you quantify the claim, determine the threshold for entitlement, and allow you to draft a more focused Statement of Claim.

We also recommend that you write to the LTD insurer and request complete production of the claimant’s file. In our experience, the insurer seldom produces the entire file prior to litigation, but they do routinely provide the medical and correspondence files. [2] Again, an examination of this information will often tend to clarify the issues in dispute and give you a good idea of how to draft the Statement of Claim and what matters will need to be proved to carry the litigation.

Early disclosure of the policy and insurer’s file will also give you the opportunity to evaluate the case before you embark on full-blown litigation. In some cases, it may be that the insurer was justified in terminating benefits, and it is clearly preferable to find this out before counsel has been put to the work and expense of drafting a claim and conducting Examinations for Discovery, only to determine that the claimant does not have a viable case. In some cases, for instance, where the claimant is a member of a Collective Bargaining Unit, the parties will be contractually obligated to dispute entitlement to LTD benefits through the internal grievance procedure rather than a civil action. The time to find out about provisions of that nature is before you have taken the time and expense to begin an action.

Proper and comprehensive disclosure by the insurer will also allow you to make a prima facie determination of whether your client might have a legitimate case for bad faith. Our experience is making boiler-plate allegations of bad faith against the insurer, and the individual adjuster, will generally make cases more difficult to resolve. We strongly advise that you should NOT plead bad faith in every case, but rather you should conduct a legitimate inquiry at the pre-examination stage to determine whether the evidence warrants pleading bad faith. Further, even if pled (as we will discuss later), counsel should make a determination at the discovery stage as to whether the evidence warrants moving forward with a bad faith case.

Detailed examination of the file will also let you determine whether this is the sort of case in which you might want to file a jury notice. In our experience, disability insurance companies have always been somewhat reluctant to put their fate in the hands of juries. Defence counsel routinely file jury notices in personal injury lawsuits, but in those cases they defend in name of the defendant rather than the name of the insurance company. It is strictly forbidden to inform the jury that the defendant has the benefit of insurance, and in fact, even raising the issue of insurance is sufficient to cause a mistrial. The concern, as I understand it, is that juries will be more inclined to find for plaintiffs if they belief that rich insurance companies will be paying the claims rather than the negligent defendant. Thus, in personal injury trials, everyone in the courtroom, except for the jury knows the truth, but we all play our part in accordance with the Rules.

The situation is different, however, in long-term disability cases where the defendant IS the insurance company. In these cases, the insurance company is the party listed on the Statement of Defence and Defence counsel is obliged to admit that de facto he is acting for, and is paid by, an insurer. Insurer’s have understandably been concerned about this level of frankness, until the late 1990s their response in Ontario was to deal with the problem by not allowing jury notices in cases relating to the non-payment of long-term disability benefits. Relying on a line of cases flowing from Justice Chadwick’s decision in MacLennan v. National Life, [3] insurers routinely struck out jury notices on the basis that LTD lawsuits were, in pith and substance, claims for declaratory relief and barred by section 108 of the Courts of Justice Act. However, that line of cases was over turned by two decisions, Haskill v. London Life [4] and Ramm [5] which both found that LTD lawsuits are nothing more or less than lawsuits for breach of contract and as such there should be no bar to a jury hearing the case. The determination of whether a particular claimant would benefit from having her case determined by a judge or a jury will, of course, be fact specific. We recommend that this determination should be made at the pre-examination stage.

Choosing who to examine – find the decision maker

The choice of who to examine in LTD litigation may be a critical decision. Many LTD insurers have professional witnesses who travel the country appearing as the representative of the defendant at Examinations for Discovery. These witnesses will have no direct experience with the file or your client. Generally speaking, examining these witnesses is of limited value. If you have a legitimate bad faith case, examinations of this sort are a complete waste of time.

The key to being able to conduct a meaningful Examination for Discovery is finding the “true” decision maker. In our experience, the decision maker varies from one company to the next, and in some cases, even on a case by case basis. Often, the primary adjuster will claim that she is the person who decided to deny a claim. While many times this is accurate, in a sizable percentage of cases, the adjuster has little independent authority, and it is the supervisor who ultimately makes the decision. In the alternative, we have seen cases where the process is ultimately made at “File Evaluation Meetings” at which a collection of adjusters (and perhaps doctors) meet as a committee to rule on a claim. [6] In a small percentage of cases, we have seen ultimate authority reside with the medical department. Finally, for a period of time, there appears to have been consideration given to farming out the decision process to dedicated Claims Management Companies, based out of the United States. [7]

My practice is to require a sworn Affidavit of Documents with Schedule “A” productions BEFORE I advise the insurer of the person I want to examine. LTD insurers are usually good about providing you with internal correspondence. We try to identify the lowest decision maker on a file that had a significant role in the decision to terminate benefits. Examination of the decision maker may give you first hand information that you would never obtain by examining the insurer’s professional witness. For example, a couple of years ago, after reviewing the production documents, we determined that the decision maker on a file was a claims representative based out of Florida. I required that she be produced in Canada and under examination she admitted that she had a grade 12 education, no medical training, no training manual, no understanding of Canadian law, no knowledge of what “CPP disability” was, had never met my client, and did not bother to even schedule a medical before terminating benefits because “we don’t do that down in Florida.”

Asking the insurer to produce the decision maker may also assist you in determining whether the LTD insurer has farmed out the file to a claims handling company. This practice, which has only recently come to light, involves situations in which large Canadian insurers have contracted with independent companies, usually American, to assist and/or take over claim handling of some files. Clients have complained that the claims handling practices in some of these cases have been very aggressive. A warning bell should sound if you are told that the decision maker is not an employee of the insurance company. Claims handling is a high-turn-over industry and the adjuster may have left; however, the adjuster may NEVER have worked for the LTD insurer in the first place. You need to determine if that is, indeed, the fact. If necessary, find out the identity of the independent claims handling company and add it as a party to your action.

Order of examinations

Some Plaintiffs counsel take the position that it is important to examine the insurer representative first in every case. The primary concern relates to undisclosed surveillance. Even in the absence of video surveillance, the insurer may have spoken to the employer and/or neighbours. I generally advise my clients that from the day we put the insurer on notice, they should consider their lives to be an open book, but the fact remains it is a tactical advantage to examine the other side first to determine if they have statements or surveillance which might be deemed damaging to your case.

Rule 31.04(3) provides that: The party who first serves on another party a notice of examination under rule 34.04 or written questions under rule 35.01 may examine first and may complete the examination before being examined by another party, unless the court orders otherwise.

Rule 31.04(2) provides that the plaintiff may serve the notice of examination after the defendant has delivered a statement of defence and (unless the parties agree otherwise) the plaintiff has served an affidavit of documents. Rule 30.03(1) provides that the parties must serve an affidavit of documents within 10 days after the close of pleadings.

As a result, the party the serves a sworn Affidavit of Documents first gets to examine first. Key concept here is that the Affidavit must be sworn. In our experience, both sides in LTD litigation tend to serve unsworn Affidavit’s long before Examinations and provide sworn copies on the morning of the examinations. However, my office makes a point of serving a sworn Affidavit early in the process to preserve our right to go first.

Consider, for instance, the case of Taylor v. Fry [8] where both the plaintiff and defendant served notices of examination before serving an affidavit of documents. The defendant then served a fresh notice of examination after service of their affidavit of documents. The court held that notices of examination served prior to the service of the affidavit of documents were irregular rather than nullities and were capable of being cured by the service of the affidavit of documents in accordance with the Rules. Thus, the plaintiff was entitled to examine first.

However, there is also law supporting the idea that the party who “initiates” the discovery process should have the option of examining first regardless of who serves the first notice of examination (see Risi Stone Ltd. v. Burloak Concrete Products Ltd. [9])

The right to go first is not modified if examinations have to be rescheduled. In Dingwall Ford Sales Ltd. v. Kenor, [10] the plaintiff arranged for an examination to be held in October, 2000 but later rescheduled to the following March. The defence took the position that since it served the fresh notice first, it was entitled to examine first, but Justice Kurisko found that the original order of examinations remained unchanged.

Note that Lindsay-Druyff v. Zurich Insurance Co., [11] stands for the proposition that you cannot serve your Notice of Examination and Sworn Affidavit prior to the close of pleadings.

Ascertain the decision making process and the validity of the denial

Lawyers that focus on motor-vehicle litigation in Ontario will be accustomed to our current no-fault system where the accident victim is subjected to an endless stream of medical assessments from the treating doctors, the tort defendant, the accident benefits insurer, and your own medical legal assessments. While the medical reports will often be contradictory, any significant case will generate dozens of medical reports.

The LTD process, however, is often completely different. LTD insurers take the position that it is the responsibility of the claimant to prove entitlement both at the initial application stage and during the change of definition stage the “any occupation” test. LTD insurers will typically write to the treating physicians for their clinical notes & records and sometimes even brief medical reports, but they rarely schedule Independent Medical Examinations when determining entitlement. Initial determinations are therefore usually based solely on the insurer’s evaluation of the medical documentation generated from the treating physicians.

The process related to the termination of benefits is often similar. Insurers may send consultants to meet with the claimant to assess level of function and transferable skills, but our experience is that they seldom arrange for their own medical assessments. It is common to have consultants who never meet the claimant conduct paper-review Transferable Skills Assessments. It is also common to have in-house medical consultants (often general practitioners) provide opinions concerning level of disability and transferable skills. Our experience is that where these opinions conflict with the opinions of the treating doctors, the in-house medical consultants’ opinions will be preferred (often to the detriment of the claimant). We have also come across numerous cases where benefits were terminated based on surveillance that was never even vetted through any medical consultant.

Another common tactic is to harass the claimant’s treating doctors to the point where they simply wash their hands of the matter. For instance, on a recent file, after writing the family doctor for the eighth time to try to get her to agree that my client could work, the family doctor replied,

I believe that I have written quite plainly that this man is unable to operate motorized vehicles in the pursuit of employment. I therefore see that probably fixing small engines if they were going would not be equally as safe. I believe that you will keep on looking for your answer with different doctors until you get the answer you want. I suggest that I am not a specialist in the area of cardiology and you should ask his cardiologist these questions. As for my past experience with [insurance company X], a GP’s opinion is not good enough. I feel like you are leading this patient on a wild goose chase. Start off with the person you want the answer from in the first place, which would be the cardiologist.

At examination for discovery on this file, the adjuster and defence counsel took the position that this letter constituted an admission by the family doctor that she was not qualified to comment on the insurer’s questions and her earlier assertions that my client was totally disabled were therefore irrelevant.

In my view, the key consideration in any LTD case is a determination of whether the decision to terminate/never pay benefits was made in good faith and was based on good and sufficient information. Especially in cases where benefits were paid for some period of time, the decision to terminate those benefits without the benefit of ANY treating physician’s opinion that the claimant can work should be viewed with suspicion. Paper-reviews conducted by in-house employees or consultants also merit serious scrutiny.

LTD insurers continue to take the position, in my view, that the claimant is under a continuing obligation to prove that he/she continues to be entitled to benefits; however, a better question to ask is why, after paying benefits for some period of time, has the insurer now come to the determine that it is right and fair to terminate those benefits? I believe that a close and vigorous challenge of the decision to terminate benefits will get the attention of the jury and result in exposure to the insurer. For this reason, the Examination for Discovery process should focus on illuminating the process undertaken by the insurer in decide to decline or terminate benefits.

Look at the Validity of the Internal Adjudication Process

A primary goal of the Discovery Process, and in fact of the entire litigation process, is ‘gathering enough evidence to determine whether the Insurer’s internal adjudication process constituted a legitimate effort to fairly and accurately evaluate whether a claimant qualifies for benefits. Plaintiff lawyers continue to be surprised and frustrated by how unwilling Insurers’ are to produce relevant documentation prior to litigation even when the claimant provides written authorization. It is almost impossible to obtain a copy of the disability policy without serving a Statement of Claim. Many insurers also routinely refuse to produce significant portions of their file – including in many cases, the medical reports which form the basis of the denial to decline benefits. Faced with such obfuscation, the claimant is simply unable to meaningfully evaluate the validity of the insurer’s internal adjudication process. The only possible response is to begin a lawsuit.

In my view, all sides would benefit from re-examining the policy decision of providing less than complete disclosure. While there is no doubt that in many cases, it is inevitable the litigation will flow from the decision to terminate or deny benefits, there is also no doubt that in a significant percentage of cases, plaintiffs’ counsel who were afforded the opportunity to make a comprehensive review of the file would conclude that the insurer’s decision was indeed fair and reasonable. Even if there was room for argument, counsel might decide that the case was too risky to accept on a contingency-fee basis.

However, as matters stand now, the examination of the validity of the internal adjudication process normally occurs at the Examination for Discovery stage. In our office, our goal is to ascertain whether the insurer conducted a bona fide legitimate appeal or whether it appears to be nothing more than a paper exercise leading to an inevitable conclusion. As such, we are interested in whether the decision maker was properly qualified and trained to make the determination. We look at whether an unfair burden was put on the claimant, who in many cases may not be sophisticated and who may be suffering from a disability with psychological overtones, to prove his or her case.

We are particularly interested in what role, if any, is played by medical and vocational assessors. Given that most plaintiff’s counsel still have practices dominated by motor vehicle litigation, we remain profoundly surprised at how LTD entitlements are usually determined without any attempt to refer the claimant for an independent medical examination. In fact, it is usually only after we send a notice letter that insurers give consideration as to whether they want to force an evaluation. This invariably gives rise to the controversy as to whether the insurer will be entitled to multiple medical examinations pursuant to the policy and the Rules. [12] Where entitlement to benefits is determined without recourse to an independent examination, we are keenly interested on whether the insurer goes to the effort of having a neutral outside medical or vocation expert review the file. While the use of an in-house medical department may be better than nothing, there is widespread concern that captive medical advisors are less than fully impartial. Further, we often encounter in-house advisors who profess to have superior insight than highly-respected medical specialists. We tend to see the same doctors on file after file. When we see the same doctor provide opinions on clients with heart conditions, fibromyalgia, failed back syndrome, chronic stress, psychiatric illness and malabsorption deficiencies, we are understandably concerned.

Plaintiffs’ counsel is also interested in evaluating the internal appeals process. It is fair to say that there is generally little confidence in the appeal process. We have seen situations where the same medical team or adjusters review their own initial findings. This is akin to the process in pro sports where Roger Goodell and Gary Bettman hear appeals of their own suspensions. We have actually seen files where the insurer advised that they shut down the appeal process as soon as they receive a letter from a law firm acting for the claimant. My office is not aware of a single case where an appeal resulted in befits being restored. Knowing that the appeals branch was arms-length and client-focused would go a long way in restoring faith in this system. In the meantime, given concerns about limitation periods and financial stress, make it unlikely that most claimants will wait before launching a claim. A primary purpose of Discoveries is to evaluate the transparency and fairness of the entire adjudication process.

Evaluate Every Document and Look for Critical Areas of Non-Disclosure

There is considerable divergence with respect to how to actually conduct an examination of an insurer’s representative. On the one extreme, I am aware of a lawyer who routinely advances bad faith claims naming both the insurer company and individual adjusters. It is not uncommon for his Discoveries to last two or even three days. On the other extreme, many plaintiff’s counsel prepare for an LTD discovery as if it were an uncomplicated motor vehicle case. They spend minimal time preparing and complete the entire process in little more than an hour.

Our view, not surprisingly, is that best practice is somewhere between these two extremes. Bad faith litigation should be the exception rather than the norm. Bad faith allegations breed hard feelings and lead to an aggressive, entrench response. This should not prevent counsel from advancing the bad faith case where warranted (this is more fully discussed below); however, such allegations should be reserved for the appropriate case. Similarly, tort-based attitudes and practices based in motor vehicle and slip-and-fall litigation are not properly transferrable to the more complex LTD litigation cases, and despite common practice, it is not possible, in my view, to conduct a proper examination in much less than half a day, even in the simplest cases.

In the first place, the Schedule “A” productions of the insurer are generally significant. They are regularly one or two thick briefs comprising several hundred documents, [13] as opposed to the typical motor vehicle where the typical Affidavit may have only a dozen items or so. Further, our practice is to examine on each and every Schedule “A” document. In many cases, questions are limited to verifying the nature of the document and why it is relevant. However, every document should be verified; every author should be identified; and the purpose of every paper should be established. If we don’t understand a document, we ask about it. It is also important to get a translation for the myriad of abbreviations and acronyms that dominate the internal correspondence of all LTD insurers.

We recommend that counsel take the time to verify the policy produced is indeed the proper one for the litigation. In this age of escalating premiums and aging workers, there appears to be an ongoing dialogue between insurers and employers concerning cost control. The result is often changes to the disability policy. It is important to verify that the policy produced was the one in place when the disability crystallized, and further what steps were taken to inform employees concerning any changes. Unilateral modification of coverage might lead to a potential action against either the insurer or, more likely, the employer.

Another area that often gets overlooked is the documentation concerning the calculation of the benefit. The formula for calculating entitlement is contained in the policy. There may be one universal formula, or the calculation might vary depending on the type, or class, or employee. Most insurers generally have a worksheet, often computer generated, to calculate the benefit amount. Counsel should verify that the employee has been properly classed, that the taxable or non-taxable nature of the benefit is set out accurately, and that the income used to calculate the benefit is properly recorded. Again the policy will govern. We therefore ask the insurer to take us to the formula, to identify is there are classes of employees, and to clarify whether base or gross income is used to calculate the benefit. Does overtime get taken into consideration? What about bonuses or commissions? Is there a cap in play? These numbers also need to be verified with the client. It is surprising how often the insurer is provided with out-of-date information from the employer which negatively affects the calculations.

We also spend time during the discovery making sure that all relevant documentation is disclosed. This is not to say that the insurer is trying to hide information. In the age of electronic communication, merely producing a copy of the paper file may be insufficient. Are there emails sitting in peoples’ in-boxes? Has the insurer complied with its e-discovery obligations? Have conversations been recorded? Are there drafts of documents or minutes of minutes? Also, while some files are centralized in one location, in some systems there may be separate sub-files maintained by the front-line adjuster, the supervisor, administration and accounting, the appeals section, medical and vocational and rehabilitation. Have all of these sub-files been produced. We are often informed that there is, say, no medical file. From our perspective, the failure to have a sub-file of this nature may be as relevant as whatever information might have been contained therein.

There are some documents which seem to be universally left out of insurer’s Schedule “A” productions. For instance, good counsel will always request the C.V.’s of any doctors used by the insurer to adjudicate the file, but they are never produced in advance. Similarly, we have never seen a Policy and Procedure Manual produced. The existence of such manuals was an area of contention several years ago which appears to have settled somewhat for the time being. Frankly, as Plaintiffs’ counsel, we remain surprised and concerned that many insurers continue to take the position that such manuals do not exist. If the manuals do exist, then it is difficult to understand why they would not be produced to bolster the argument that proper procedures were followed to fairly adjudicate the claim. The failure to have such manuals, in our view, is at least as serious a problem as having the manuals and ignoring them. Given the fact that the front-line adjustors often don’t have any specialized training, both claimants and insurers would likely be served by having a rule book to guide parties.

In fact, a significant portion of our Discovery is spent delving into the qualifications of the decision-making adjuster. What education and training does she have? Does she have access to a policy manual? What support and ongoing training does she have? Many claimants are disappointed to find that a life-changing decision like whether to grant or deny benefits is delegated, in some cases, to adjusters who appear to be under-qualified and under-trained.

Another section of the Schedule “A” productions which warrants significant attention is the medical sub-file. We take the time to find out every doctor who has touched the file. We ask for the qualifications of that doctor as well as his or her C.V. We also want to know if the doctor maintains a treating practice or whether he or she works entirely as a consultant. Is the doctor captive or independent? Does the doctor have specialized expertise in our client’s particular disability claim? Did the doctor or the adjuster consider asking for an actual examination or was the review limited to an examination of the paper? If so, why? Also, did the doctor and his adjuster appear to insist that the claimant provide “objective findings” to support the claim for disability, even though the policy does not require same. Insisting on objective evidence is often unfair, if not impossible. [14] Taking this position may constitute the basis for a bad faith claim and particular attention should be taken at discoveries to explore whether the insurer is imposing unreasonable requirements. [15]

In a minority of cases, adjusters consult with vocational experts before terminating benefits. It is frankly surprising that so few matters are referred to vocational experts since the question if entitlement of benefits pursuant to an LTD contract is almost exclusively determined by ability to work, either at one’s old job or any job suitable to the claimant (depending on the definition that is in play). If a voc assessment was conducted, it is important to get full disclosure of that process. Insurer voc experts tend to use industry-created software to determine alternative job possibilities. These programs are open to challenge. Also, the quality of the output is determined by the quality of the input. So for instance, if our client was a grade 8 drop-out and the voc program printout assumes he was a high-school graduate, then the entire assessment is flawed.

If there was no referral to a voc specialist, it is worth asking why.

Finally, we recommend that counsel should not accept a “boiler plate” Schedule “B” that fails to list specific documents. Of course, the most important Schedule “B” item is surveillance. If surveillance has been conducted, you should NEVER accept an undertaking to produce a summary at a later date, but rather take the time to have counsel go over the surveillance in detail. There are no valid grounds for failing to disclose the existence of, and the substance of surveillance. While most defence counsel are aware of their obligations in this regard their remains a small minority of situations where this remains a problem.

In addition to surveillance, you should also spend the time to ascertain if there have been any expert reports generated. We have also seen cases where counsel takes the position that communications with the employer are protected. In our view, no privilege can attach to these conversations. Such conversations and communications may be a breach of our client’s privacy rights and should, for all these reasons, be vigorously explored.

Decide Whether to Build the Bad Faith Case

The Supreme Court of Canada’s judgment in Fidler v. Sun Life Assurance Company of Canada [16] has caused the plaintiff’s bar to reconsider how it deals with punitive damages in LTD litigation. If the decision has not been made beforehand, the Discovery process should be used to ascertain if there are real and sufficient grounds for pursuing a punitive damages cases.

In Fidler, the Court affirmed the trial judge’s $20,000 award for aggravated damages, but at the same time, overturned the $100,000 punitive award imposed by the British Columbia Court of Appeal. Fidler provides guidance from the Supremes on both the applicability of aggravated damages for what have become known as “peace of mind contracts” and the availability of punitive damages in the insurance context.

It is important to remember that what the Supremes did in this case was to restore the decision of the trial judge that had been modified by the BC Court of Appeal. The Court spent a fair amount of time reviewing the purpose of punitive damages and the general reluctance that the Courts should exercise in awarding those damages.

The Court made specific note of the fact that the trial judge carefully and fully considered au of the evidence before coming to the conclusion that the actions of Sun Life, although troubling, did not meet the criteria for bad faith and therefore there was not an independent actionable wrong upon which to ground a claim for punitive damages. [17] The Court of Appeal overturned the decision because it found “palpable and overriding error on the question of bad faith.” [18] The decision of the Court of Appeal was based on three considerations: (1) there was an absence of medical evidence to justify denying the claim; (2) Sun Life exaggerated the surveillance results in order to avoid looking ‘bad’ in the event of litigation, and (3) Sun Life failed to disclose the surveillance video to the plaintiff. The Court of Appeal also chose to regard Sun Life’s eleventh hour decision to reinstate benefits with interest as “the civil equivalent of a guilty plea.”

The Supreme Court of Canada shared these concerns and agreed that Sun Life’s conduct was “extremely troubling” and “the five year denial by Sun Life of disability benefits without medical support for the denial is, to say the least, inappropriate.” [19] However, the Supreme Court nevertheless overturned the Court of Appeal and restored the decision of the trial judge where punitive damages were not awarded. Chief Justice McLaughlin rejected the idea that reinstating benefits was akin to a guilty plea. Further, for all the misdeeds of Sun Life, the test for punitive damages was reduced to,

Whether the denial was the result of the overwhelmingly inadequate handling of the claim, or the introduction of improper considerations into the claims process. [20]

In deciding whether this standard had been breached, the Court decided that the proper approach was deference to the trial judge who had carefully considered “every salient aspect” of how Sun Life handled the claim including those actions found objectionable by the Court of Appeal. Since the trial judge did not find an improper purpose on the part of Sun Life, the higher courts should not interfere.

It is respectfully submitted, however, that the reversal of the punitive award was not as much an attempt to rein in punitive damages awards as an effort to reinforce the importance of judicial deference. At the conclusion of the analysis, the Court noted,

Sun Life’s conduct was troubling but not sufficiently so as to justify interfering with the trial judge’s conclusion that there was no bad faith. The trial judge’s reasons disclose no error of law, and his eventual conclusion that Sun Life did not act in bad faith is inextricable from his findings of fact and his consideration of the evidence. [21]

In other words, we would argue, the finding of bad faith in any given case is driven by the facts of that case which are best appreciated by the trial judge. Appellant Courts ought to refrain from interfering with the factual findings and conclusions that ground a determination into whether an insurer’s conduct constitutes bad faith unless there is a clear error of law. It is at least arguable that the Supreme Court would have been just as likely to support a finding of bad faith conduct in the Fidler case if that had been the finding of the trial judge.

The insurance industry has, however, chosen to view Fidler as having a much more profound impact on the role of punitive damages in insurance litigation cases. In one recent article [22], a leading insurance defence lawyer argued that it was significant that even in the face of a finding that Sun Life’s conduct was “extremely troubling”, the Supreme Court still failed to support punitive damages. This led to the following statement which sets out the defence position regarding the importance of Fidler.

This case is important because it emphasizes that punitive damages for bad faith are available only in exceptional cases and that the court must exercise restraint in that regard. It is only where there is overwhelmingly inadequate handling of the claim or the introduction of improper considerations into the claims process where a conclusion of bad faith might be warranted. In an environment where claims for bad faith punitive damages have become standard fare in coverage enforcement litigation, the Supreme Court’s reminder of the rarity of such awards is timely. [23]

It is difficult to envision many cases where punitive damages will be awarded if this standard is actually applied to insurer’s conduct. Of course, this analysis completely ignores the fact that bad faith damages are a separate actionable wrong and may also be awarded in cases falling short of punitive conduct. It is difficult to accept, however, the Supreme Court did not see fit to intervene in a situation where a claim was wrongfully denied without supporting medical evidence for almost five years. Plaintiffs’ counsel should, in our view, attempt to distinguish Fidler on the basis that what constitutes unreasonable action should be decided on the unique facts of each case and other decisions are therefore of limited value.

Establishing fidler damagers

The insurance industry has focused on the punitive damages section of Fidler, but the Court actually spends the majority of its time dealing with the interesting question of when it should allow damages for mental distress for breach of contract. In their attempt to provide some clarity to this area of the law, the Supremes appear to have streamlined the process of obtaining damages for intangible losses resulting from the breach of peace of mind contracts.

The Chief Justice starts by noting the obvious statement that damages for breach of contract should place the plaintiff in the same position, as far as money can, as if the contract had been performed. [24] The seminal case to consider is the 1854 decision of the Court of the Exchequer, Hadley v. Baxendale. [25] This case established the basis of the modern law of damages regarding breach of contract. Contract damages should be “such as may fairly and reasonably be considered either arising naturally … from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties.” McLaughlin, J. goes on to note that damages for mental distress should be a sort of damage that could be awarded pursuant to Hadley v. Baxendale, however,

Until now, damages for mental distress have not been welcome in the family of remedies spawned by this principle. The issue in this appeal is whether that remedial ostracization continues to be warranted. [26]

The Chief Justice notes that Hadley v. Baxendale makes no distinction between the types of losses that are recoverable for breach of contract. The Courts have made awards for some non-pecuniary losses arising from breach of contract, but “they have traditionally shied away from awarding damages for mental suffering caused by the contractual breach.” [27] After reviewing the history of the law she concludes that the refusal to extend the foundational concept of reasonable expectation to include mental distress is a “ceiling” imposed due to considerations of policy. [28]

Instead of viewing mental distress damages as reasonable expectation damages, the Courts have historically resorted to an artificial distinction called the “peace of mind exception” to the general rule against recovery for mental distress in contract breaches. Damages of this nature have tended to be characterized as aggravated, rather than expectation damages and many cases have either required that plaintiffs demonstrate a separate actionable wrong to ground a claim for aggravated damages for mental distress or have declined to award those damages at all. [29]

Why does it matter whether mental distress damages are characterized as aggravated or expectation damages? Well for one thing, expectation damages are a much more ordinary remedy. Expectation damages ought to be awarded every time a contract is breached and are not contingent on some extraordinary event. Consider, for example, that in Fidler, Sun Life relied upon older authorities and argued that mental distress damages could only be awarded where the plaintiff could establish a separate actionable wrong. In Fidler, the Supremes rejected this position. They elaborated on the concept first discussed in the earlier decision of Vorvis v. Insurance Corporation of British Columbia: [30] damages for mental distress in “peace of mind” contracts should be seen as an expression of the general principle of compensatory damages as set out in Hadley v. Baxendale rather than as an exception to that principle. [31]

This begs the question of when should damages for mental distress for breach of contract be awarded? The concept that damages for mental distress may be awarded for breach of contract in some cases dates back to Lord Denning and the famous decision of Jarvis v. Swans Tours Ltd. [32] In England the House of Lords has relaxed the so called peace of mind exception to permit recovery of mental distress not only when pleasure, relaxation or peace of mind is “they very object of the contract” but also when it is a “major or important object of the contract.” [33] In Canada, damages for peace of mind contracts have been awarded for breach of vacation contracts, wedding service contracts, luxury chattels, and disability contracts. The Chief Justice sites with approval the recent position taken by the Ontario Court of Appeal that contractual damages for mental distress may be appropriate whenever peace of mind is the “very essence” of the promise. [34]

The Supreme Court provides some guidance as to when damages for breach of contract should be awarded pursuant to the application of the principle in Hadley v. Baxendale. The Court should first ask, “What did the contract promise?” If the promise was broken, the Court should provide compensation. Damages for mental distress should flow as long as they were in the reasonable contemplation of the parties. The Court notes,

It does not follow however that all mental distress associated with a breach of contract is compensable. In normal commercial contracts, the likelihood of a breach of contract causing mental distress is not ordinarily within the reasonable contemplation of the parties. It is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration. The matter is otherwise, however, when the parties enter into a contract, an object of which is to secure a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time when the contract was made. The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security. [35]

The Court goes on to note that in order to advance a case of this nature, any plaintiff will have to prove that:

a. an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and
b. that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation.

Plaintiffs’ counsel hoping to advance a case for this type of loss should use the Discovery process to look for evidence that the Plaintiff paid premiums to the insurer for LTD coverage for peace of mind and the loss of that coverage has caused damage to the claimants mental well-being. There is often evidence in the record showing that insurer representatives were advised, and should have been aware that, the failure to provide benefits detrimentally affected the plaintiff. The extent of the insurer’s awareness, or willful blindness to this situation, should be fully explored at Examination for Discovery.

It is important to realize that in Fidler, the Court is signalling a sea-change in the way we have been visualizing this type of damages. The term aggravated damages has been used ambiguously in the case law and academic writing. True aggravated damages, according to the Supreme Court, rest on a separate independent cause of action – usually in tort – like defamation, oppression or fraud. Damages of this nature do not arise out of any breach of contract and are not related to contractual damages under the rule in Hadley v. Baxendale. Damages for mental distress for breach of peace of mind contracts – such as LTD contracts – are expectation damages “based on what was in the reasonable contemplation of the parties at the time of contract formation. They are not true aggravated damages awards.” [36]

Given this new formulation of this type of damages, information related to the representations of the parties at the time of contract formation will likely become more important. Advertising, representations, benefit handbooks, and promises made by the insurance company to the employer and the employees should be examined when building this portion of the case, and should be the subject matter of consideration at the Examination for Discovery stage.


Given the demographic changes facing our society, it remains likely that LTD litigation will remain a growth area. In our view, both sides would benefit from a more transparent claims handling procedure. Given that early disclosure di relevant evidence remains problematic, the Examination of the insurer’s representative is a key stage in the litigation process. Provided that counsel takes the time to identify the proper representative to examine, a detailed and comprehensive examination will assist the Claimant in evaluating the internal decision making process, the validity of the process, the advisability of proceeding with bad faith litigation, and the prospects for settlement.


[1] Our experience is that LTD insurer’s will often refuse to produce the policy as they allege that the policy is the ‘property’ of the employer. The LTD insurer will require us to obtain the policy directly from the employer. However, once litigation is commenced, the policy is usually item #1 in the Defendant’s Affidavit of Documents.

[2] Although they do often refuse to produce any internal medical documents and independent medical examination reports they have on file.

[3] (1994), 28 C.P.C. (3d) 35 (ON. Gen. Div)

[4] [1997] O.J. No. 6044 (Gen. Div.)see M. Steven Rastin, “Judge or Jury: Where to Turn for Insurance Claims”, 1998 OTLA Spring Conference, Day II, Tab 2 for a more detailed discussion of this case. See also Cullen v. Sun Life of Canada, [2000] O.J. No. 1625 which cites Haskill leave to appeal decision with approval and follows Ramm.

[5] Supra, note 1.

[6] It is worth noting that in cases we have come across that utilize this procedure, we have generally been told that there are no minutes or records of these proceedings.

[7] Such practices in the USA were met with strong resistance and gave rise to a number of bad faith litigation lawsuits.

[8] Taylor v. Fry (1996), 29 O.R. (3d) 714 (Gen. Div.)

[9] Risi Stone Ltd. v. Burloak Concrete Products Ltd. (1987), O.J. 2462 (H.C.J.)

[10] Dingwall Ford Sales Ltd. v. Kenor (Town), C.P.C. (5th) 144 (S.C.J.)

[11] Lindsay-Druyff v. Zurich Insurance Co. (2009), O.J. No. 2309 (S.C.J.)

[12] See M. Steven Rastin, “Meds, Lies and Videotape: Are Defendants Allowed Multiple Examinations Under the Rules and the Contract and Can you Videotape them?” (OTLA LTD Conference, January 2011)

[13] LTD Defence counsel are to be commended for the comprehensive disclosure which is now provided almost as a matter of course.

[14] Consider for instance fibromyalgia and chronic pain or chronic fatigue cases.

[15] See Traynor v..Unum (2003) 65 I.R. (3d) 7 and Stickel v. Unum (2010) 0.N.S.C. 4179 (S.C.J.) for cases holding that insurers should be admonished by relying on lack of objective findings.

[16] (2006) SCC 30 (CanLII), [2006] S.C.J. No. 30. [Fidler]

[17] A requirement established by the Supreme Court in Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanLII), [2002] 1 S.C.R. 2002.

[18] Supra, note 28, at para 67

[19] Supra, note 28, at para 71

[20] Supra, note 28, at para 71.

[21] Supra, note 28, at para 75.

[22] Nigel Kent, “Fidler v. Sun Life Assurance to keep punitive damages rare,” in The Lawyers Weekly (August 11,2006) at page 10.

[23] Ibid., p. 11. (emphasis mine).

[24] Supra, note 28, at para 27.

[25] (1854) 9 Ex. 341, 156 E.R. 145 at 151

[26] Supra, note 28, at para 28.

[27] Supra, note 28, at para 31.

[28] Consider Bingham.LJ in Watts v. Morrow, [1991] 1 W.L.R. 1421 (CA) at p. 1445, “A contract breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his beach of contract may cause to the innocent party. This rule is not, I think, founded on the assumption that such reactions are not foreseeable, which they surely are or may be, but on considerations of policy.”

[29] Fidler, supra, paragraphs 32-37; especially see Addis v. Gramophone Co., [1909] A.C. 488 (H.L.)

[30] 1989 CanLII 93 (SCC), [1989] 1 S.C.R. 1085

[31] Fidler, supra, paragraph 43.

[32] [1973] 1 All E.R. 71 (C.A.)

[33] Fidler, paragraph 40 referring to Farley v. Skinner, [2001] 4 All E.R. 801 (H.L).

[34] Ibid., paragraph 41 referring to Prinzo v. Baycrest Centre for Geriatric Case (2002) CanLII 45005 (Ont C.A.), (2002), 60 O.R. (3d) 474.

[35] Fidler, supra, paragraph 45.

[36] Fidler, Ibid., paragraph 54