Appeal Court reduces punitive damages for bad faith.

On June 19, 2015, the Saskatchewan Court of Appeal reduced awards of extra-contractual damages made on March 21, 2013. The trial decision of a Justice of the Saskatchewan Court of Queen’s Bench assessed punitive damages totalling $5,000,000 against two insurers in a recent trial decision, Branco v. American Home Assurance et. al., 2013 SKQB 98. In rendering a decision in which he found the insurers’ treatment of the insured to be “calculated and abhorrent”, Justice Acton sent a message to all insurers doing business in Canada: “It is hoped that this award will gain the attention of the insurance industry.”

The Plaintiff Mr. Branco was a welder employed overseas in Kyrgyzstan. American Home Assurance Company (AIG) was his WCB insurer and Zurich Life Insurance Company (“Zurich”) was his LTD insurer. The Plaintiff sustained two workplace injuries to his foot in 1999  that rendered him totally disabled.

The written reasons of Justice Acton span 98 pages and present a catalog of conduct on the part of the two Defendant insurers over many years that frustrated the Plaintiff’s efforts to obtain benefits to which he was entitled, forcing him into dire financial circumstances of which  the insurers were well aware. The conduct found as fact by Justice Acton includes:

  • Arbitrarily stopping payments;
  • Withholding periodic payments for several years before making a lump sum payment:
  • Imposing unreasonable and inappropriate conditions to the continuation of benefits;
  • Exploiting the Plaintiff’s financial vulnerability to compel him to accept an “unconscionably low” settlement; and
  • Not disclosing to the Plaintiff for seven years that his claim had been approved.

The Trial Judge considered the insurers’ conduct to be comparable to the “harsh and unreasoning opposition” of Pilot Insurance Co. that resulted in a $1,000,000 punitive damages award in the ground breaking Supreme Court of Canada decision in Whiten v Pilot Insurance Co. (2002). The Trial Judge also found that the policies issued by AIG and Zurich were “peace of mind” contracts (like the homeowner’s policy considered in Whiten v Pilot Insurance). Therefore, harsh conduct on the part of the insurers was particularly offensive.

In awarding punitive damages of $1,500,000 against AIG Justice Acton noted that AIG had not learned its lesson from an earlier punitive damages award of $60,000 in a similar case (Sarchuk v Alto Construction, 2003 SKQB 237).

In awarding punitive damages of $3,500,000 against Zurich Justice Acton stressed the importance of future deterrence: “Considering that Zurich is doing business worldwide, it would only take six individuals worldwide who accept low offers like the ones made to Branco to save Zurich $500,000 each and recoup the amount of this award.”

The Saskatchewan Court of Appeal upheld the findings of the trial judge, but reduced the awards as follows:

(a)        AIG: the appeal is allowed to the extent (i) the finding that AIG is obliged to pay Mr. Branco additional benefits is set aside (subject to para. 92, above); (ii) the award of punitive damages is reduced from $1.5 million to $175,000; and (iii) the award of damages for mental distress is reduced from $150,000 to $15,000.

(b)        Zurich: the appeal is allowed to the extent (i) the award for punitive damages is reduced from $3 million to $500,000; and (ii) the award of damages for mental distress is reduced from $300,000 to $30,000.

Notwithstanding the reduced awards, this case is a reminder to insurers generally that claims must be handled in accordance with the policy terms and the insured’s reasonable expectation that, having paid premiums, he or she will obtain benefits provided for in the policy, not hassle and obstruction.