Aggravated damages explained.

The Supreme Court of Canada decision in Fidler vs. Sun Life, released on June 29, 2006, clarified the legal principles for awarding aggravated damages in Canada.

Facts of the Case

Ms. Fidler was a bank receptionist who, at the age of 36, became ill and was eventually diagnosed with chronic fatigue syndrome and fibromyalgia. She began receiving LTD benefits from Sun Life in 1991. The benefits were terminated in 1998, based to a large extent on video surveillance which Sun Life felt detailed activities inconsistent with her claim that she was incapable of performing light or sedentary work. Several weeks prior to the action going to trial, Sun Life re-instated benefits with interest. The only issue at trial was Ms. Fidler s entitlement to punitive and aggravated damages. The trial judge awarded Ms. Fidler $20,000.00 in aggravated damages for mental distress but dismissed her claim for punitive damages.

The British Columbia Court of Appeal unanimously upheld the $20,000.00 award for mental distress damages, and, in a surprising move, two of the three judges on the panel allowed Ms. Fidler’s cross appeal and awarded her $100,000.00 in punitive damages. The two appeal judges held that the trial judge had made a palpable and overriding error in denying Ms. Fidler’s claim for punitive damages.

The Court of Appeal relied on three aspects of the trial record in allowing the claim for punitive damages: the absence of medical evidence justifying a denial of Ms. Fidler’s claim; Sun Life s internal memoranda exaggerating the surveillance evidence; and Sun Life s failure to disclose to Ms. Fidler the surveillance video on which it relied in denying her claim.

Sun Life sought leave to appeal, which was granted by the Supreme Court of Canada. The Supreme Court allowed Sun Life’s appeal on the issue of punitive damages and threw out the Court of Appeal’s $100,000 award in punitive damages. The Supreme Court felt that Sun Life’s conduct was troubling, but not sufficiently so as to interfere with the trial judge s conclusion that there was no bad faith. The trial judge’s reasons disclosed no error of law, and his eventual conclusion that Sun Life did not act in bad faith was inextricable from his findings of fact and his consideration of the evidence.

The Implications

The Supreme Court’s analysis of damages is good news for claimants. Aggravated damages can be awarded to compensate a disabled plaintiff for the mental stress arising out of an improperly denied claim. Their purpose is to compensate an insured plaintiff for their suffering as opposed to punitive damages, which are meant to punish an insurer for its improper action.

It will be difficult for insurers to resist claims for aggravated damages. It seems relatively easy for an insured who has been improperly denied LTD benefits to claim they have suffered distress and anxiety as a result. Accordingly, insurers have been rightfully more concerned about awards of aggravated damages in Canada than punitive damages.

The Supreme Court held that in Ms. Fidler s case, one object of her disability insurance contract was to secure the psychological benefit of income protection in the event of disability. This brought the prospect of mental distress upon breach of contract within the reasonable contemplation of both parties at the time the contract was made. Accordingly, the Supreme Court affirmed the approach the British Columbia Courts have adopted in dealing with aggravated damage awards against disability insurers. The Supreme Court held that LTD contracts are not mere commercial contracts, but rather are contracts with benefits that are both tangible as far as monthly payments are concerned and intangible, such as the comfort of knowledge that it will provide income security in the event of disability.

As a result of the Fidler decision, aggravated damages awards against insurers will likely become fairly routine in cases where LTD benefits are determined by the trial judge to have been improperly denied.