Long-term disability (LTD) insurance protects you if you become disabled and are unable to continue to work in your job. The LTD policy is a contract that outlines the rights and obligations of both the insured person and the insurance company. Every contract is different and provides for different benefits and procedures that must be followed.
Generally speaking, the disabled person must cooperate by communicating openly and honestly with his or her insurer about things like treatment and work status. For its part, the insurer is obligated to consider all the evidence presented, to make a fair and reasonable decision, and to explain its decision to the insured.
If an insurance company fails to live up to its obligations under an LTD policy, the insured person may sue the insurance company for breaching its side of the contract, and can recover damages to compensate them for the insurance company’s breaches. Usually, these damages consist of all the wrongfully-withheld benefits owing under the policy, interest, and legal costs. Additional compensatory damages may also be available if the insurance company’s breach has led to other foreseeable losses for the insured person. And in many cases, the insurance company may be ordered to put the insured person back on claim and to resume paying them benefits under the policy going forward.
But there is another type of damage award that an insured person may be entitled to if an insurance company breaches the terms of the policy; one that is not necessarily based on the particular terms of the policy.
Our courts have found that insurance policies are a special category of contract. They are not like most contracts, where two parties negotiate the terms on more-or-less equal footing: insurance companies obviously wield a lot more power than their customers in the bargaining process and in formulating the terms of the coverage they will provide. In addition, the thing that is being contracted for under the policy is of a special nature: it is not a random good or service like any other; the coverage the insurer is providing in exchange for the premiums it receives provides vital protection and peace of mind to insured persons.
Because of the special nature of the insurance relationship, courts have routinely found that insurance companies owe their customers a duty of utmost good faith. This is a duty that arises from the relationship between a disabled person and the insurer, rather than the from the wording of the contract: you will not find a section in your LTD policy called ‘good faith’!
This means that the exact content of this duty can vary from case-to-case, and doesn’t depend on exactly what wording is in a given policy. It can relate to things like the way a claim is handled by an insurance company, the way a decision is made about a claim, or simply a lack of proper communication between the insurer and the disabled person.
Where an insurer breaches this duty of good faith, the insured person may be entitled to seek additional damages from the insurance company, beyond the relief normally provided in the insurance policy. The damages typically come in the form punitive damages. These are damages that aren’t designed to compensate a plaintiff for a loss, but are instead about punishing the bad behaviour of a defendant.
Courts have looked at these damages in a number of cases.
In the 2002 case of Whiten v. Pilot Insurance, an insurer ignored the opinion of an independent expert and refused to pay a family whose house burned down. The Supreme Court described the insurer’s conduct as “high-handed, malicious, arbitrary or highly reprehensible misconduct,” and supported a massive punitive damage award against the insurance company. The court emphasized that this type of damage award is not normal and is meant only for cases of particularly bad conduct.
In the 2006 decision of Fidler v. Sun Life, the Supreme Court outlined clearly that disability insurance is meant to provide insured persons with a psychological benefit of knowing they will have income even if disabled. Denying a disabled person their disability benefits can be a separate actionable wrong.
In a 2014 decision, Fernandes v. Penncorp, the Ontario Court of Appeal noted that insurers must deal with an insured’s claim fairly, and that this relates to both how a claim is investigated and how the decision is made. Insurers must not take advantage of economic vulnerability or deny to gain leverage.
Not every unpleasant thing an insurance company does will constitute bad faith and entitle an insured person to extra damages, and it is not always easy to identify when a claim for bad faith damages should be brought.
Insured persons making claims for disability benefits should seek the assistance of an OTLA member experienced with long-term disability disputes to help them determine if they have a claim for bad faith damages in their LTD dispute.
What is bad faith in my long-term disability claim?
