BACKGROUND

Sarah Baker, the Plaintiff, suffered a stroke while exercising in October of 2013. She was 38 years old and the Director of Food Services, Environmental, and Porter or Transport Services at Humber River Hospital. In this role, Ms. Baker was insured under a disability insurance policy by Blue Cross Life Insurance Company of Canada ("Blue Cross").

After her stroke, Ms. Baker went on short term disability until she was cut off by Blue Cross in January of 2014. Ms. Baker successfully appealed this decision internally and her short-term disability benefits were reinstated in March of 2014.

After 30 weeks, Ms. Baker brought an application for long-term disability (LTD) benefits after exhausting her allotted short-term benefits. Blue Cross paid Ms. Baker LTD benefits for two years, during which they stopped payments for a 7-month period until she successfully appealed the denial internally. Under the Blue Cross policy, after the first two years of payment of LTD benefits, the definition of "total disability" changes. Ms. Baker was denied LTD benefits under this new definition and despite participating in two levels of internal appeals, she was unable to obtain LTD benefits.

Having exhausted the Blue Cross' appeal process, Ms. Baker commenced this action for her benefits and for aggravated and punitive damages.

THE TRIAL

The issues at trial were as follows:

1. Is Ms. Baker totally disabled within the meaning of Blue Cross' long-term disability policy?
2. Is Ms. Baker eligible for retroactive benefits to the date of the trial in the amount of $220,604.00?
3. Is Ms. Baker eligible for aggravated damages?
4. Are punitive damages appropriate?

After a 22-day jury trial, the jury returned a verdict in favour of Ms. Baker on all issues. She was declared totally disabled as per the LTD policy definition, afforded the retroactive benefits claimed, awarded $40,000 in aggravated damages for mental distress, and the highest punitive damages award in Canadian jurisprudential history: $1,500,000. Justice Vella also found that full indemnity costs were appropriate in this case and fixed these costs at over $1 million.

THE APPEAL

Blue Cross appealed exclusively the punitive damages award and the costs award, asserting that a contextual and fair reading of the entire record demonstrates that Ms. Baker's claim was handled in a balanced and reasonable manner.

Punitive Damages

Appellate courts are afforded greater scope and discretion when reviewing jury awards of punitive damages than an ordinary award of damages (Hill v Church of Scientology of Toronto, [1995] 2 S.C.R. 1130 at para 197). The appellate review should be based on the court's estimation as to whether the misconduct of the defendant was so outrageous that punitive damages were rationally required to act as deterrence. With respect to the amount for punitive damages, the Supreme Court of Canada in Whiten v Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595 at para 107 held that the test is whether a "reasonable jury, properly instructed, could have concluded that an award in that amount, and no less, was rationally required to punish the defendant's misconduct.

At trial, the jury was instructed that punitive damages should be imposed only if "there has been high-handed, malicious, arbitrary, or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour". With regard to quantum, they were told that "punitive damages are given in an amount [that] is no greater than necessary to rationally accomplish these objectives" and that "judges and juries in our system have usually found that moderate awards of punitive damages which inevitably carry a stigma in the broader community, are generally sufficient".

Blue Cross submitted that they acted in good faith despite its erroneous assessment of Ms. Baker's level of disability. However, Blue Cross elected to only call a witness whose involvement in Ms. Baker's claim was limited to a review of the final decision not to reinstate benefits at the time of change of the applicable definition of "total disability". This was the only evidence called to counter the evidence that it acted in bad faith; as a result, they failed to present sufficient evidence to meet its onus on the appeal.

On the other hand, there was ample evidence to support an award of punitive damages. The examples included at para 28 of the decision are as follows:

• Blue Cross stopped the payment of benefits on three separate occasions. On each occasion, it denied benefits first and then asked for additional documentation instead of first warning Ms. Baker of a potential cut-off and requesting additional documentation.
• Blue Cross relied on opinions from its contracted general practitioners, which it knew or ought to have known were incorrect. [...]
• Blue Cross selectively relied on evidence that supported the denial of benefits and ignored conflicting medical evidence. [...]
• In the face of conflicting medical evidence, Blue Cross delayed obtaining an independent medical exam of Ms. Baker. [...]
• Blue Cross distorted Dr. Kane's neuropsychological assessment report in a way that supported the denial of benefits. [...]
• Blue Cross repeatedly omitted the caveats in Dr. Kane's report in their internal files and communications and in communications with Ms. Baker. [...]
• Blue Cross misread Ms. Kresak's Transferable Skills Analysis report ("TSA") in a way that supported the denial of benefits. [...]
• Blue Cross persisted in distorting Dr. Kane's and Ms. Kresak's reports even after the respondent's lawyer wrote to it and pointed out the errors.

[29] In the face of this evidence, Blue Cross asserts that, while it reached the wrong conclusion about Ms. Baker's condition, it acted in good faith. It was open to the jury to accept this theory of the case. However, to do so, it would have had to ignore the coincidence that every time Blue Cross erred in handling the respondent's file, it was to her detriment and to the benefit of Blue Cross.

The Court of Appeal concluded that these examples, or any combination thereof demonstrate a "pattern of misconduct that, at best, shows reckless indifference to its duty to consider the respondent's claim in good faith and conduct a good faith investigation, and at worst, demonstrates a deliberate strategy to wrongfully deny her benefits, regardless of the evidence that demonstrated an entitlement" and offered the jury a sufficient basis on which to award punitive damages.

Regarding the amount of punitive damages awarded, the Court of Appeal emphasized the importance of deterrence in first-party insurance cases. In such cases, a significant award is needed to deter Blue Cross and other insurers from exploiting the vulnerability of insureds who are entirely dependent on their insurers when disaster strikes.

Hourigan J.A. stated that an award of $1.5 million was "little more than a rounding error for Blue Cross" – a large insurance corporation. Anything less would fail to garner the attention of senior executives, let alone deter future misconduct. Hourigan J.A. also spoke to the arguably systemic nature of Blue Cross' behaivour, reinforcing why a significant award of punitive damages is required.

Otherwise, a small award is effectively spread over all the other cases where claimants have decided that it is not worth suing to obtain the benefits they are legally entitled to receive.

In conclusion, the Court held that there was no basis for appellate interference with the quantum of the punitive damages award as it was rationally connected to the evidence and the purposes of punitive damages, and was required to deter similar misconduct by Blue Cross.

Costs

Justice Hourigan granted leave to appeal of the costs award because the trial judge erred in creating a new category of cases where full indemnity costs will automatically follow. However, Justice Hourigan then made further order that the quantum of the costs awarded was correct on the grounds that Blue Cross' conduct and its decision to turn down a generous settlement offer justified an award of full indemnity costs. As a result, the costs appeal was dismissed.

Note: This a reprint of an article by Lindsay Charles and Jamie Davison (Summer Student) of McLeish Orlando LLP.