What happens if LTD benefits are unreasonably withheld?
Where policy holders have been forced to commence litigation against the insurance company due to the denial of their LTD benefits, they may also seek damages for mental distress and punitive damages. These claims seek compensation for unfair treatment or unreasonable delays caused by the insurance provider. For example, where the policy holder shows that he or she should have received benefits from the moment they made a claim, or that they should not have been cut-off from benefits, they may be awarded damages for mental distress and/or punitive damages, in addition to any lump sum payment for retroactive and future LTD benefits.
The Supreme Court of Canada held in Fidler v. Sun Life, that a contract for long-term disability insurance is a “peace of mind contract”. The reason for this, is that the purpose of LTD insurance is the have peace of mind provided by having income protection. The Court held in Fidler that the availability of mental distress and punitive damages in LTD litigation flows from the breach of the peace of mind contract.
Mental distress damages and punitive damages differ in that the first is meant to compensate the policy holder for his or her suffering, while the latter, as the name suggest, is meant to punish the insurance provider where its conduct warrants it.
The Court in Fidler established that due to the nature of disability insurance contracts, as “peace of mind contracts”, the parties would have contemplated at the time the contract was entered into that mental distress would result if the insurance provider refused to pay benefits to the policy holder when it should have. As a result, it is common for plaintiffs in LTD insurance claims to seek this kind of damages.
Punitive damages on the other hand are reserved for situations where the conduct of the insurance company constitutes a “marked departure from the ordinary standards of decency” giving rise to an “independent actionable wrong”. In the LTD litigation context, the Courts have found that insurance providers owe a duty of good faith which requires it to address a policy holder’s claim fairly. A breach of the duty to act in good faith has been determined to constitute an independent actionable wrong. Therefore, where the Court finds that the insurance provider has failed or refused to deal with a claim fairly, breaching its duty of good faith, it may award punitive damages.
However, simply denying a claim that is later determined by a Court to have merit is not by itself a failure to act in good faith. Punitive damages are reserved for particularly egregious conduct. For example, punitive damages have been awarded against insurance companies where it was shown that LTD benefits were denied, not on the merits of the claim, but in order to pressure the policy holder to settle the claim for less than the policy entitlement. It can be difficult to establish a claim for punitive damages as the threshold set by the Courts, regarding what conduct warrants it, is quite high.
We regularly advise our clients throughout the litigation of LTD claims and the damages available for their specific circumstances. You may contact us at any time with your LTD questions.