Mental distress damages flow from a breach of the policy.

The Supreme Court of Canada set aside an award of punitive damages of $100,000 against a disability insurer (“Sun Life”), but upheld an award of $20,000 in aggravated damages for mental distress for breach of contract.

Fidler worked as a bank receptionist and was covered by a group policy that included long-term disability benefits. At the age of 36, she became ill and was eventually diagnosed with chronic fatigue syndrome and fibromyalgia and began receiving long-term disability benefits in January 1991. Under the terms of the policy, Fidler was entitled to continued benefits after two years only if she was unable to do any job. In May 1997, Sun Life informed Fidler that her benefit payments would be terminated and indicated that it had conducted video surveillance of Fidler detailing activities inconsistent with Fidler’s claim that she was incapable of performing light or sedentary work. Sun Life’s denial of benefits was followed by almost two years of correspondence with Fidler and medical professionals. Sun Life received medical evidence to the effect that Fidler was not yet capable of doing any work. However, Sun Life elected to rely on its own consultants and experts and confirmed its decision to terminate benefits in December 1998. Fidler then commenced an action and, one week before trial, Sun Life offered to reinstate Fidler’s benefits and to pay all arrears with interest. The only issue to proceed at trial was Fidler’s entitlement to damages.

At trial, the trial judge awarded Fidler $20,000 in aggravated damages for mental distress, but refused to make a punitive damages award against Sun Life finding that Sun Life had not acted in bad faith. On appeal, the Court of Appeal unanimously upheld the award for mental distress and a majority of the Court awarded Fidler an additional $100,000 in punitive damages finding that the trial judge had made a palpable and overriding error on the question of bad faith. Sun Life appealed this decision.

The Supreme Court of Canada held that damages for mental distress for breach of contract may be recovered where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made. There is no requirement for an independent actionable wrong. In order to be successful, a plaintiff must prove his or her loss and the Court must be satisfied that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. In this case, given the nature of a disability insurance contract, it would have been within the reasonable contemplation of the parties at the time the contract was made that mental distress would likely flow from a failure to pay the required benefits. The mental distress at issue here was of a degree sufficient to warrant compensation and the trial judge’s award of $20,000 in aggravated damages to compensate Fidler for the psychological consequences of Sun Life’s breach of contract was upheld.

The Supreme Court of Canada set aside the Court of Appeal’s award of punitive damages. The Court noted that punitive damages are not compensatory and are designed to address the purposes of retribution, deterrence and denunciation. However, an insurer will not necessarily be liable for such damages by incorrectly denying a claim that is eventually conceded, or judicially determined, to be legitimate. The question in each case is whether the denial was a result of the overwhelmingly inadequate handling of the claim, or the introduction of improper consideration into the claim’s process. In this case, the trial judge had reviewed the evidence thoroughly and found that Sun Life had not acted in bad faith. The conduct of Sun Life in its consideration of the matter was troubling but not sufficiently so as to justify interfering with the trial judge’s conclusion that there was no bad faith.