Wrongful Denial of Insurance Benefits results in significant Punitive Damage Award


In Baker v Blue Cross Life Insurance Co. of Canada, the Ontario Superior Court recently awarded a plaintiff $1,500,000 in punitive damages and $1,083,953.50 in a costs award, where an insurer wrongfully denied the plaintiff’s long-term disability coverage.

In this case, the Plaintiff suffered brain damage while exercising. Initially, Blue Cross Life Insurance provided coverage for long-term disability, but later terminated those benefits since it believed the Plaintiff did not meet the definition of “total disability” as defined by its policy. The case does not state what the definition of “total disability” was in this particular policy; however, it is common place for insurance policies of this nature to contain a broad definition that the person must not be capable of completing any of their job duties or the duties of any other job.

The Plaintiff alleged that Blue Cross Life Insurance wrongfully terminated her long-term disability benefits by relying on an overly technical interpretation of the criteria for “total disability.” The Jury agreed, and awarded the Plaintiff retroactive benefits in the sum of $220,604, punitive damages in an amount of $1,500,000, and aggravated damages in the sum of $40,000.

In the costs award (Baker v Blue Cross Life Insurance Co. of Canada, 2023 ONSC 1891), Justice Vella of the Ontario Superior Court of Justice determined that the wrongful denial of long-term disability benefits by an insurer constitutes a sufficient reason to justify elevated costs.

The Court reasoned that while insurers are entitled to challenge the eligibility of an insured person’s request for coverage, insurers must be mindful that they risk wrongfully denying coverage of an insured who is economically disadvantaged. In these cases, they deprive a person of the insurance policy to which they initially paid for. The Court stated as follows:

15  Insurers are entitled to challenge the eligibility of insureds to the requested insurance benefits in court. If their conduct in the course of litigation is reprehensible or outrageous or there are special circumstances, then the elevated scale of substantial indemnity may be warranted. Otherwise, the usual scale of costs of partial indemnity should follow the cause in the normal course (subject to a successful r. 49 offer).

16  However, insurers must bear the risk if they wrongfully deny coverage in long-term disability policies, forcing an insured, who is economically disadvantaged from challenging the insurer by reason of a wrongful denial of benefits, to pursue costly litigation that can take years to resolve. In the interim, economic hardship is likely to occur as the insured is unable to work and is deprived of the monthly income the insurance she purchased was supposed to provide.

As a result, the Court determined that in the case of long-term disability insurance cases, the insured must pursue litigation against their insurer to obtain the contractual monthly benefits they purchased under the long-term disability insurance policy. In these cases, it would not be fair to “erode” an insured’s fixed monthly income replacement benefit by paying its own legal fees.

The Court determined:

19  I am therefore exercising my discretion under s. 131 of the Courts of Justice Act to award full indemnity costs. I find that the wrongful denial of long-term disability benefits by an insurer, given the unique character of long-term disability insurance policies, constitutes special circumstances justifying this elevated award. By so doing, I am not commenting on the propriety of extending this rationale to other types of insurance contracts as those circumstances were not before me.

Ultimately, the Court awarded costs on a full indemnity basis in an amount of $960,000, inclusive of taxes and disbursements in an amount of $123,453.50.

This case should serve as a cautious reminder that insurers should not rely on overly technical interpretations of their disability policies, as any wrongful denial of coverage may result in a momentous punitive damage award.

This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.


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