Fernandes v. Penncorp Life Insurance Company/ La Compagnied'Assurance-Vie Penncorp

[Indexed as: Fernandes v. Penncorp Life Insurance Co.]

Ontario Reports

Court of Appeal for Ontario,

Juriansz, Pepall and van Rensburg JJ.A.

September 2, 2014

122 O.R. (3d) 192 | 2014 ONCA 615

Case Summary

Insurance — Insurer's duty of good faith — Damages — Defendant insurer terminating disability benefits and failing to pay plaintiff for six years despite its own experts' opinions that plaintiff was totally disabled — Trial judge finding that plaintiff was totally disabled and awarding plaintiff punitive damages of $200,000 and mental distress damages of $100,000 in addition to contractual damages — Award of punitive damages affirmed on appeal — Trial judge not erring in finding that defendant had breached its duty of good faith and had not dealt with vulnerable plaintiff in fair and balanced manner — Mental distress damages reduced on appeal to $25,000 — Trial judge not explaining how he arrived at figure of $100,000 and award disproportionate in light of evidence that circumstances other than defendant's conduct contributed to plaintiff's psychological distress.

The plaintiff operated a bricklaying business. He injured his back in 2004, when he was 40 years old, and was unable to work. The defendant insurer started paying the plaintiff disability benefits. It received reports from its own experts that the plaintiff was totally disabled. Based solely on surveillance evidence, the defendant terminated the plaintiff's benefits in 2005. The plaintiff sued the defendant. The trial judge found that the plaintiff was totally disabled. He noted that the surveillance evidence only showed the plaintiff engaging in light work for short periods of time. In addition to contractual damages, he awarded the plaintiff punitive damages of $200,000 and mental distress damages of $100,000. The defendant appealed the punitive damages and mental distress damages.

Held, the appeal should be allowed in part.

The trial judge did not err in finding that the defendant's handling of the claim demonstrated bad faith and that the defendant had not dealt with the vulnerable plaintiff in a fair and balanced manner. It was open to the trial judge to find that the surveillance video did not "remotely establish" the plaintiff's ability to perform the work of a bricklayer and that there was never any doubt that the plaintiff was totally disabled from performing any of the important daily duties pertaining to his occupation of bricklayer. The trial judge's findings and conclusion relating to punitive damages should not be disturbed.

The trial judge did not explain how he arrived at the figure of $100,000 for mental distress damages, and the award appeared inordinately high and entirely disproportionate, given that the evidence was that circumstances apart from the defendant's conduct contributed to the plaintiff's psychological distress. Moreover, while not determinative, the plaintiff had only sought $25,000 at trial. The mental distress damages should be varied to $25,000.

Cases referred to

702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd's of London, 2000 CanLII 5684 (ON CA), [2000] O.J. No. 866, 184 D.L.R. (4th) 687, 130 O.A.C. 373, [2000] I.L.R I-3826, 95 A.C.W.S. (3d) 556 (C.A.); [page193] Barrick Gold Corp. v. Lopehandia (2004), 2004 CanLII 12938 (ON CA), 71 O.R. (3d) 416, [2004] O.J. No. 2329, 239 D.L.R. (4th) 577, 187 O.A.C. 238, 23 C.C.L.T. (3d) 273, 49 C.P.C. (5th) 1, 31 C.P.R. (4th) 401, 131 A.C.W.S. (3d) 655 (C.A.); Fernandes v. Penncorp Life Insurance Co., [2013] O.J. No. 2172, 2013 ONSC 2803, [2013] I.LR. I-5434, 20 C.C.L.I. (5th) 165, 228 A.C.W.S. (3d) 237 (S.C.J.); Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3, [2006] S.C.J. No. 30, 2006 SCC 30, 271 D.L.R. (4th) 1, 350 N.R. 40, [2006] 8 W.W.R. 1, J.E. 2006-1316, 227 B.C.A.C. 39, 57 B.C.L.R. (4th) 1, [2006] R.R.A. 525, 53 C.C.E.L. (3d) 1, 39 C.C.L.I. (4th) 1, [2007] CLLC Â210-015, [2006] I.L.R. 4521, EYB 2006-107056, 148 A.C.W.S. (3d) 902; Lumsden v. Manitoba, [2009] M.J. No. 48, 2009 MBCA 18, [2009] 4 W.W.R. 10, [2009] I.L.R. I-4807, 236 Man. R. (2d) 130; McQueen v. Echelon General Insurance Co. (2011), 107 O.R. (3d) 780, [2011] O.J. No. 4563, 2011 ONCA 649, 285 O.A.C. 64, [2011] I.L.R. I-5207, 2 C.C.L.I. (5th) 196; Nance v. British Columbia Electric R. Co., 1951 CanLII 374 (UK JCPC), [1951] J.C.J. No. 6, [1951] 3 D.L.R. 705, 1951 CLB 435, 2 W.W.R. (N.S.) 665, 67 C.R.T.C. 340, [1951] 2 All E.R. 448, [1951] A.C. 601 (P.C.); Pate Estate v. Galway-Cavendish (Township) (2013), 117 O.R. (3d) 481, [2013] O.J. No. 5017, 2013 ONCA 669, 312 O.A.C. 244, 12 C.C.E.L. (4th) 83, 6 C.C.L.T. (4th) 37, 16 M.P.L.R. (5th) 179, 368 D.L.R. (4th) 193, [2014] CLLC Â210-010; Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, [2002] S.C.J. No. 19, 2002 SCC 18, 209 D.L.R. (4th) 257, 283 N.R. 1, J.E. 2002-405, 156 O.A.C. 201, 20 B.L.R. (3d) 165, 35 C.C.L.I. (3d) 1, [2002] I.LR. I-4048, REJB 2002-28036, 111 A.C.W.S. (3d) 935

APPEAL by the defendant from the judgment of Hambly J., [2013] O.J. No. 1304, 2013 ONSC 1637 (S.C.J.) for an award of damages.

Paul J. Pape and Sanam Goudarzi, for appellant.

Daniel J. Fife and Maple Anne Cameron, for respondent.

The judgment of the court was delivered by

[1] PEPALL J.A.: — The trial judge awarded the respondent, Avelino Fernandes, $236,773 in damages for failure of the appellant, Penncorp Life Insurance Company/La Compagnie d'Assurance-Vie Penncorp, to pay disability benefits. He also awarded punitive damages of $200,000, aggravated damages of $100,000 (hereinafter referred to as "mental distress damages") and full indemnity costs of $212,130.66.

[2] The appellant does not challenge the award of damages for failure to pay disability benefits. It only challenges the punitive and mental distress damages awards and, if successful, asks that the total cost award be halved. It submits that there was no reasonable basis for an award of punitive damages and challenges the quantum of the mental distress damages award.

[3] For the reasons that follow, I would dismiss the appeal of the punitive damages award and allow the appeal of the mental distress damages award. [page194]

Facts

(i) Personal background

[4] The respondent was born on a farm in Portugal and left school after the equivalent of grade eight in Canada. He became a bricklayer. He operated a bricklaying business in Kitchener, Ontario. He worked ten to 12 hours a day for six to seven days a week. His work involved erecting and dismantling scaffolding, lifting heavy planks on and off the scaffolding, mixing cement, laying and lifting bricks and blocks, and driving a forklift. It was very heavy work but he was good at it; indeed, he loved his work. He made as much money as he needed and never felt the need for more.

[5] On December 11, 2004, he fell off a scaffold from a height of about eight feet and injured his back. Two days later, on December 13, 2004, he fell off a trailer from a distance of about three feet, again injuring his back. Following the accidents, he was unable to work, his successful company ceased operating and his employees departed.

[6] At the time he was injured, the respondent was 40 years old.

(ii) Insurance

[7] The respondent had not paid into a government employment insurance or a provincial workers' compensation plan, and was therefore not entitled to employment insurance or workers' compensation.

[8] However, he did have disability insurance, which he had purchased from the appellant in July 2002 and for which he paid a premium of $908.50 semi-annually. The policy of insurance entitled the respondent to benefits for a period of two years if he was unable to work at his own occupation as a result of injuries. Thereafter, the policy entitled him to benefits if he was disabled from working at any occupation for which he was reasonably fitted by education, training or experience.

[9] The policy provided $3,000 in monthly benefits for total disability. Total disability was defined in the insurance policy as:

TOTAL DISABILITY, whenever used in this Policy, means that as a result of Injury the Insured is under the Regular and Personal Care of a Physician, and is unable to perform any of the important daily duties pertaining to his occupation or profession and is not gainfully employed in any other occupation or profession. Total disability is deemed to have begun with first medical treatment following Injury. After the Monthly Benefit for such Total Disability has been paid for twenty-four months, then thereafter during the remainder of such Disability, Total Disability means the complete inability of the Insured to engage in any and every occupation or profession for which he is reasonably fitted by reason of education, training or experience. [page195]

[10] The policy also provided for partial disability benefits, which were payable for a maximum of four months. Partial disability was defined in the insurance policy:

PARTIAL DISABILITY, whenever used in this Policy, means that as a result of Injury, the Insured is under the Regular and Personal Care of a Physician and sustains loss of salary or business income due to his inability to perform one or more important daily duties of his occupation or profession.

[11] The policy also addressed the payment of partial disability benefits:

If Injury causes Partial Disability within ninety days after the date of the Accident and continues uninterrupted until the expiration of the Elimination Period For Injury stated in the Policy Schedule, if any, or immediately following a period of Total Disability for which benefits were payable under Part One, the Company will pay periodically an amount equal to one-half of the Monthly Benefit stated in the Policy Schedule (1/60 of such Monthly Benefit for each day of any period less than a full month) during which such Partial Disability continues, but not to exceed four months for Any One Accident.

The policy had no elimination period.

(iii) Insurance claim

[12] Following his falls, the respondent attended at an urgent care clinic where he saw Dr. Kim on December 14, 2004. He also consulted his family doctor, Dr. Huth, on December 22, 2004.

[13] The respondent submitted a claim for benefits to the appellant on January 23, 2005. He sought payment from December 14, 2005 when he saw Dr. Kim.

[14] The claim enclosed a report from Dr. Huth dated January 21, 2005. Next to the questions "How long was (or will) patient (be) partially disabled? (Able to perform some but not all of his/her occupational duties?)", Dr. Huth wrote: "From Dec. 11/04 to Feb. 11/05." Next to the inquiry "If patient is still disabled, please indicate present physical restrictions or limitations", Dr. Huth wrote: "Cannot work as bricklayer due to pain."

(iv) Initial contacts with the insurer's representative

[15] Janet Mayo, a claims advisor for the appellant, made the decisions regarding the payment or non-payment of the respondent's claim.

[16] On February 14, 2005, the respondent called Ms. Mayo. He advised her that he had no other insurance and that he did not know at what point he would return to work.

[17] Ms. Mayo testified that the respondent indicated to her that he had not worked at all and therefore she started payment of total disability benefits. The appellant made a payment of [page196] $3,700 to the respondent on February 14, 2005 for the period December 14, 2004 to January 21, 2005.

[18] On February 14, 2005, the respondent commenced physiotherapy.

[19] On March 21, 2005, the respondent signed a supplemental claim report. In response to the question "What normal duties are you unable to perform?", he wrote: "bending, lifting, turning".

[20] The appellant received a further report dated March 29, 2005 from Dr. Huth in which he stated that the respondent's progress was "slow and tedious" and that the respondent had been prescribed pain medication. Dr. Huth opined that the respondent would be able to resume some of his usual duties/ activities prior to May 15, 2005, and that he would recover sufficiently to resume full duties/activities prior to June 1, 2005. He also stated that the respondent's ability to repetitively lift bricks was limited.

[21] On April 8, 2005, the appellant paid the respondent $6,000 for the period January 21, 2005 to March 21, 2005.

[22] One month later, on May 8, 2005, Ms. Mayo spoke with the respondent again. He told her that he had not returned to work but had unsuccessfully tried to finish off some work from a job he had prior to his injury. He had lasted a couple of hours but then had had to call someone else in to finish the work. His back was getting worse and the pain was going down his leg. He also said that he had started massage therapy and that his doctor had referred him for a CAT scan.

[23] On May 10, 2005, the appellant paid the respondent $3,000 for the period March 21, 2005 to April 21, 2005.

(v) Pre-surveillance interview

[24] In her notes to file, Ms. Mayo wrote that on May 13, 2005, she set up a "claimant interview [and] pre-surveillance as we may want to do surveillance in future. Also do financial check."

[25] On May 24, 2005, Mark Lockhart of Quality Investigative Services Ltd. interviewed the respondent. The respondent told him that he was unable to do anything that involved bending, twisting or heavy lifting. Mr. Lockhart's report stated that the respondent reported that he tried to keep himself moving and doing little things around the house and that when asked for an estimated return to work date, the respondent said that he did not have one. The report stated that one of his therapists/doctors had stated possibly by the end of June 2005. [page197]

(vi) Independent medical examination

[26] Thereafter, the appellant referred the respondent to Dr. Hupel, an orthopedic surgeon, for an independent medical examination. The respondent saw him on June 2, 2005.

[27] The appellant received Dr. Hupel's report on July 8, 2005. In response to the question "In your view, does the [respondent] suffer from a physical condition, which prevents [him] from returning to [his] former position at work on a full-time basis?", Dr. Hupel wrote: "At present, I feel that in the absence of radiological investigations, this man should not return to his former employment. Following review of the investigations suggested, I would be pleased to comment further on his return to work."

[28] On June 10, 2005, the respondent spoke with Ms. Mayo by phone and requested a copy of the investigative report and Dr. Hupel's report. She told him that it was the appellant's policy not to provide investigative reports to an insured. She said that she would send Dr. Hupel's report to the respondent's family doctor, Dr. Huth, but she never did so. Dr. Huth did receive the report from someone however.

[29] On June 20 and July 22, 2005, the appellant paid the respondent $3,000 for each of the periods April 21, 2005 to May 21, 2005 and May 21, 2005 to June 21, 2005.

(vii) Dr. Huth's report

[30] The respondent attempted to work in the week of June 28, 2005, but was unable to do so.

[31] On August 10, 2005, the appellant received a supplemental claim report from the respondent stating that his current activities consisted of limited household activities. He attached a report dated July 21, 2005 from Dr. Huth.[^1] In this report, Dr. Huth stated that "it does not seem that this man will be able to work at bricklaying again". He noted that the respondent was having physiotherapy and that an EMG and an MRI were pending. The June 6, 2005 CAT scan showed a problem with the respondent's lumbar spine.

[32] On August 22, 2005, the appellant paid the respondent $3,000 for the period June 21, 2005 to July 21, 2005. This was [page198] the last payment the respondent would receive from the appellant until September 2011.

(viii) Surveillance

[33] At some point, the appellant retained Quality Investigative Services Ltd. to conduct surveillance on the respondent. The appellant received its report, dated August 17, 2005, on August 24, 2005. The report addressed surveillance conducted on August 3, 10 and 11 and provided a video synopsis. As noted by the appellant, the observations for the latter two days were unremarkable. The respondent was not observed doing any work on those days.

[34] The August 3, surveillance was maintained from 6:00 a.m. to 4:00 p.m. outside the respondent's residence. He was observed to be working in his backyard and about his house from 1:35 p.m. until 3:02 p.m. He was seen shovelling what appeared to be a powder mixture from a van into a pail and wheeling it into the backyard in a wheelbarrow. He removed tools and other work-related items from his backyard. He lifted the wheelbarrow and a wooden skid into the back of a trailer.

(ix) Decision to terminate benefits

[35] After viewing the surveillance, Ms. Mayo decided not to pay any further disability benefits beyond July 21, 2005. She testified that it appeared that the respondent's activities were inconsistent with the information he was providing to the appellant. She also testified that the appellant was not receiving any medical reports from the respondent's doctor.

[36] She made the decision to terminate benefits in the absence of any medical evidence indicating that the respondent was other than totally disabled. At that point, the medical evidence was from Dr. Huth and Dr. Hupel, who had both expressed the opinion that the respondent could not return to bricklaying.

[37] Although she made the decision in August 2005, Ms. Mayo never directly told the respondent that she was terminating his benefits until close to five months later, when on January 17, 2006 she wrote a letter to him.

(x) Further report from Dr. Huth

[38] On October 3, 2005, the appellant received a supplemental claim report dated September 23, 2005 from the respondent. Enclosed was a report dated September 20, 2005 from Dr. Huth. He stated that the respondent was reporting continuing back pain, had problems with the discs in his lower back [page199] and could not lift repetitively. Dr. Huth stated that there was no progress and the date when the respondent could resume some of his usual activities was unknown as was the date when he would be sufficiently recovered to resume full activities.

[39] Between September 26 and October 28, 2005, the respondent again tried to work as a bricklayer but was unable to do so.

(xi) Additional surveillance

[40] The appellant arranged for further surveillance of the respondent in the fall of 2005. Surveillance was conducted on November 8, 9, 21 and 22, 2005 for a total of 21 hours. During this time, the respondent was observed driving his vehicle but he was not observed doing any work.

(xii) Request for reinstatement of benefits

[41] On November 14, 2005, the respondent was involved in a motor vehicle accident in which he injured his left shoulder and neck.

[42] On December 6, 2005, the respondent requested reinstatement of his benefits, retroactive to July 22, 2005, and provided the appellant with a completed form entitled "Occupational Inquiry for Self-Employed Claimants". I will refer to this form as the "December 6 questionnaire". In it, the respondent was asked to outline the physical activities involved in his job. In response, he provided the appellant with a completed form to which he attached a detailed description of his heavy work as a bricklayer.

[43] On December 21, 2005, Ms. Mayo completed a claim report. She wrote that she had discussed the August surveillance with the respondent and told him that it had shown him actively physically working. She also wrote that she tried to close the claim.

[44] In her testimony she explained this entry. She testified that she had indicated to the respondent that it appeared that he was partially disabled and not totally disabled and she discussed providing him with partial disability benefits. These represented a maximum of four months of benefits.

[45] She testified that she felt the appellant was partially disabled based on the surveillance. She also relied on the fact that he had reported that he had tried to work on a number of occasions.

[46] Ms. Mayo subsequently discussed the claim review with the appellant on December 28, 2005. Her notes show that the appellant insisted that he remained totally disabled. [page200]

[47] As mentioned, Ms. Mayo finally wrote to the respondent on January 17, 2006 to advise him that his benefits were terminated. Her letter stated:

Total disability whenever used in this policy means that as a result of an injury, you are unable to perform all the important daily duties pertaining to your occupation or profession and are not gainfully employed in any other occupation or profession.

Information received from both you and your doctor and local investigations carried out indicate that you continued to work on a partial basis; therefore, you do not meet the definition of total disability as defined in the policy.

[48] Further correspondence between the parties did not resolve the issue.

[49] In February and June 2006, the appellant received additional surveillance reports showing the respondent engaged in various employment-related activities such as shovelling, unloading large boxes onto a wheelbarrow, sweeping and pushing a wheelbarrow.

(xiii) Commencement of action

[50] On July 17, 2007, the respondent commenced an action against the appellant. He claimed that since December 13, 2004, he had been and continued to be totally disabled and asserted a damages claim of $1 million. He also claimed the return of premiums paid in error, mental distress damages of $100,000 and punitive damages of $500,000.

[51] In defence, the appellant took the position that the respondent was not, since the termination of benefits on July 21, 2005, totally disabled as defined by the policy. It also denied the claims for mental distress and punitive damages.

[52] Following commencement of the action, the appellant received the results of additional surveillance of the respondent conducted on its behalf, additional medical information, and a vocational assessment and functional capacities evaluation. The medical information included an opinion from the appellant's own expert, Dr. McGonigal, an orthopedic surgeon, stating that the respondent could not go back to work as a bricklayer.

[53] At trial, Ms. Mayo conceded that, based on the information, the appellant knew by the end of 2010 that Mr. Fernandes could not go back to work as a bricklayer.

[54] That said, the appellant did not make that concession and pay the respondent for the period July 22, 2005 to December 22, 2006 until September 19, 2011.

[55] With respect to the post-December 22, 2006 period, the question at trial was whether the respondent was disabled from [page201] engaging in any occupation for which he was reasonable fitted by reason of education, training or experience.

Trial Judge's Decision

(a) Contractual damages

[56] At the trial of the action, the respondent sought $233,536 representing the post-December 22, 2006 period plus the return of premiums he had unnecessarily paid while disabled.

[57] The trial judge conducted a detailed review of the evidence, including that of the respondent and the respondent's assessments and attempts at rehabilitation. He found the respondent to be a credible witness.

[58] He also reviewed in detail the surveillance evidence conducted over 19 days between August 2005 and February 2010, and referenced portions of the video summary that highlighted some of the respondent's activities during the periods of surveillance. He noted that the surveillance evidence only showed light work for short periods and that this represented a small portion of his time. The surveillance omitted periods of recuperation and "bad days". The trial judge considered the expert medical evidence and the appellant's handling of the respondent's claim.

[59] He referred to the August 27, 2012 report of Dr. Reid, the orthopedic surgeon called by the respondent, writing, at para. 46 of his reasons:

Dr. Reid, in his report dated August 27, 2012, stated that "the point is that he really could not do any bricklaying work of any kind as he does not have the physical abilities to do it." He also stated that Avelino "is totally and substantially disabled from duties of any occupation for which he has requisite education skills and experience."

[60] The trial judge also referred to the reports of Dr. McGonigal, the orthopedic surgeon called by the appellant. He noted, at para. 47 of his reasons, that Dr. McGonigal had testified that the respondent should not be considered physically capable of returning to his occupation of bricklayer on a full-time basis. It was Dr. McGonigal's opinion that the respondent was "not at the present time physically capable of returning to this work either on a part-time or modified basis".

[61] Having reviewed the evidence, the trial judge concluded that the respondent continued to suffer from a total disability. He determined that the respondent was unable to perform substantially all of the duties of his occupation as a self-employed bricklayer. Additionally, the trial judge was satisfied that, given the respondent's limitations, he was disabled from any occupation for which he was reasonably suited by education, training or [page202] experience. As such, the respondent met the definition of total disability contained in the policy and was entitled to damages of $236,773 for breach of contract plus the return of premiums.

(b) Mental distress damages

[62] The respondent sought $25,000 on account of mental distress damages arising from the appellant's conduct. In his written submissions filed at the trial of the action, the respondent acknowledged that his anger and stress were not caused solely by the appellant's conduct. In its written submissions, the appellant argued that if aggravated damages were to be awarded, they should not come close to the $20,000 awarded in Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3, [2006] S.C.J. No. 30, 2006 SCC 30.

[63] In addressing this issue, the trial judge considered the decisions of Fidler and McQueen v. Echelon General Insurance Co. (2011), 107 O.R. (3d) 780, [2011] O.J. No. 4563, 2011 ONCA 649, and observed that those decisions had upheld mental distress damages awards of $20,000 and $25,000 respectively.

[64] He determined that the respondent had purchased disability insurance from the appellant so as to provide peace of mind. The appellant had not paid him for six years from August 2005 until September 2011. At para. 63 of his reasons, the trial judge wrote:

The failure of Penncorp to pay Avelino what it contracted to pay him, both from being disabled from doing bricklaying and from doing any other occupation for which he is reasonably suited by education, training and experience, has humiliated Avelino. It has made him dependent on Tracy financially. He was a proud, self-reliant man who always worked to the fullest extent possible. He has suffered great mental distress as a result of the failure of Penncorp to pay him what it contracted to pay him. I find that this would have been in the reasonable contemplation of the parties as the likely result of Penncorp's failure to honour its obligations to Avelino under the contract of insurance when they entered into the contract.[^2]

[65] Later in his reasons, the trial judge awarded $100,000 in aggravated damages to the respondent. He gave no reasons for the quantum.

(c) Punitive damages

[66] In his written submissions filed at the trial of the action, the respondent sought $500,000 in punitive damages. The appellant argued that an award of punitive damages was unwarranted. [page203]

[67] In addressing this issue, the trial judge considered the decisions of both Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, [2002] S.C.J. No. 19, 2002 SCC 18, and Fidler.

[68] He noted that the surveillance did not remotely establish that the respondent was able to do the heavy continuous labour he had done as a bricklayer. Additionally, the appellant had received Dr. Huth's report dated August 10, 2005 in which he opined that the respondent would not be able to work at bricklaying again. The appellant never received a contrary opinion. After viewing the surveillance, the appellant's own expert, Dr. McGonigal, wrote that it was "impossible to say whether [the respondent] could return to work on a full time basis as a bricklayer".

[69] The trial judge commented that there was no evidence that Ms. Mayo ever considered the detailed description of the heavy nature of the bricklaying work that the respondent submitted with his completed December 6 questionnaire and she tried to settle the claim on the basis that he was partially disabled when, in the trial judge's opinion, there was never any doubt based on the information the appellant had that the respondent was totally disabled. Later in his reasons, he wrote that Ms. Mayo ignored the detailed job description of his occupation of bricklaying that he had provided along with the December 6 questionnaire.

[70] He concluded that the appellant's handling of the claim demonstrated bad faith. Citing 702535 Ontario Inc. v. Non-Marine Underwriters, Lloyd's of London, 2000 CanLII 5684 (ON CA), [2000] O.J. No. 866, 184 D.L.R. (4th) 687 (C.A.), he found that the appellant's efforts to settle the claim on the basis of partial disability and its denial of benefits for six years amounted to a denial of coverage or delay of payment "in order to take advantage of the insured's economic vulnerability or to gain bargaining leverage in negotiating a settlement".[^3] Ms. Mayo took an adversarial approach and did not deal with the claim fairly and in a balanced way. The conduct constituted an independent actionable wrong and met the test for punitive damages. It was "highhanded, malicious, arbitrary or highly reprehensible misconduct". He then awarded $200,000 in punitive damages. [page204]

Punitive Damages Award

A. Grounds of appeal

[71] First, on the issue of punitive damages, the appellant submits that its conduct did not depart markedly from ordinary standards of decency and did not require punishment. There was no high-handed conduct or bad faith. The trial judge erred by failing to appreciate that coverage for partial disability was a component of the insurance policy and Ms. Mayo's efforts to settle the claim on the basis of partial disability were reasonable in light of what the policy contemplated and the information she had, including the surveillance videos that were inconsistent with the respondent's reporting. The trial judge never addressed the appellant's defence to that effect and never asked himself whether the decision was made in good faith.

[72] The appellant also submits that the trial judge made palpable and overriding errors in his punitive damages analysis. It submits that there was no evidence that the December 6 questionnaire was ignored by the appellant: Ms. Mayo was not cross-examined on the issue and her notes of her claim review of December 21, 2005 refer to this document and to the medical information she had and demonstrate that she considered both during her review of the claim.

[73] Additionally, the appellant submits that the trial judge focused on whether the surveillance evidence established that the respondent could continue bricklaying. Instead, he should have asked whether it was reasonable to conclude, based on the August 3, 2005 and video evidence, that the respondent was either partially disabled or a malingerer.

B. Analysis

[74] The law relating to punitive damages was canvassed in detail by the Supreme Court in Whiten and addressed again more recently in Fidler. The key applicable principles may be summarized as follows.

Punitive damages are designed to address the objectives of retribution, deterrence and denunciation, not to compensate the plaintiff: Whiten, at paras. 43 and 94; and Fidler, at para. 61.

They are awarded only where compensatory damages are insufficient to accomplish these objectives: Whiten, at para. 94.

They are the exception rather than the rule: Whiten, at para. 94. [page205]

The impugned conduct must depart markedly from ordinary standards of decency; it is conduct that is malicious, oppressive or high-handed and that offends the court's sense of decency: Whiten, at paras. 36 and 94; and Fidler, at para. 62.[^4]

In addition to the breach of contract, there must be an independent actionable wrong: Whiten, at para. 78; and Fidler, at para. 63.

In a case of breach of an insurance contract for failure to pay insurance benefits, a breach by the insurer of its contractual duty to act in good faith will constitute an independent actionable wrong: Whiten, at para. 79; and Fidler, at para. 63.

[75] In considering the issue of good faith, it must be emphasized that disputing or refusing a meritorious claim does not, in itself, constitute a breach of a duty to act in good faith: Fidler, at para. 63.

[76] The decision of 702535 Ontario Inc. v. Lloyd's of London, Non-Marine Underwriters, supra, which was approved by the Supreme Court in Fidler, describes the parameters of an insurer's duty, at paras. 29 and 30:

The duty of good faith also requires an insurer to deal with its insured's claim fairly. The duty to act fairly applies both to the manner in which the insurer investigates and assesses the claim and to the decision whether or not to pay the claim. In making a decision whether to refuse payment of a claim from its insured, an insurer must assess the merits of the claim in a balanced and reasonable manner. It must not deny coverage or delay payment in order to take advantage of the insured's economic vulnerability or to gain bargaining leverage in negotiating a settlement. A decision by an insurer to refuse payment should be based on a reasonable interpretation of its obligations under the policy.

This duty of fairness, however, does not require that an insurer necessarily be correct in making a decision to dispute its obligations to pay a claim. Mere denial of a claim that ultimately succeeds is not, in itself, an act of bad faith.

(Citation omitted)

[77] Applying these principles to this appeal, the trial judge considered the applicable jurisprudence and concluded that, [page206] in addition to its breach of the insurance contract to pay disability benefits, the appellant had also breached its duty of good faith. He heard the evidence over the course of an eight-day trial and had the opportunity to observe the witnesses, including the respondent, whom he found to be credible, and Ms. Mayo, and to review the documentary evidence. The trial judge found that the appellant had not dealt with the respondent in a fair and balanced manner and that the appellant's representative, Ms. Mayo, had taken an adversarial approach to the respondent's claim and met the test for an award of punitive damages.

[78] There was evidence to support this conclusion:

Ms. Mayo stopped coverage in a vacuum of medical evidence that would support her position. The benefits were terminated contrary to the medical evidence; indeed, there was no medical evidence, including that of the insurer's own independent doctor, Dr. Hupel, that supported termination. At the time the benefits were terminated, the appellant had opinions from both Dr. Huth and Dr. Hupel supporting the respondent's claim that he was disabled from his own occupation of being a bricklayer.

The surveillance evidence did not reasonably support the appellant's decision to terminate benefits.

The appellant failed to formally advise the respondent of the termination of his benefits until about five months after the fact. It simply ceased sending the disability benefit cheques.

Ms. Mayo attempted to shut down the respondent's claim in December 2005 on the basis of a four-month payment of partial disability benefits. Moreover, if she did believe that partial disability benefits were payable, she nonetheless never paid any such benefits to the respondent.

After terminating his benefits effective July 2005, the appellant only paid the respondent the remainder of his two years of benefits in September 2011, five years after they had been terminated, even though the appellant knew that the respondent could not go back to being a bricklayer.

[79] As for the appellant's allegations of palpable and overriding error, at paras. 44 and 64 of his reasons, the trial judge wrote that there was no evidence that Ms. Mayo considered the detailed description of the heavy work required of the respondent's work as a bricklayer, which was submitted with his [page207] completed December 6 questionnaire. In para. 65, he stated that she ignored the detailed job description of his occupation as bricklayer.

[80] In my view, these comments do not amount to palpable and overriding errors of fact. Based on the record before him, it was open to the trial judge to make the findings and conclusions he did. While Ms. Mayo clearly received the respondent's completed December 6 questionnaire, there indeed was no evidence that she considered the details of the physical activities involved in his job that were attached to the form. Furthermore, she terminated his benefits before she received the completed form. In these circumstances, it was reasonable for the trial judge to conclude that she ignored the detailed job description that had been provided by the respondent.

[81] The appellant also takes issue with the trial judge's finding in his reasons that the August 3, 2005 surveillance video did not establish that the respondent was able to do the heavy labour of bricklaying. The appellant submits that the trial judge ought to have asked whether, based on the video, it was reasonable to conclude that the respondent was partially disabled or a malingerer.

[82] Again, based on the record before him, it was open to the trial judge to conclude that the August 3, 2005 video did not "remotely establish" the respondent's ability to perform the work of a bricklayer and that there was "never any doubt" that the respondent was totally disabled from performing "any of the important daily duties pertaining to his occupation" of bricklayer. It is implicit in these findings that the trial judge considered that it was unreasonable to conclude that the respondent was partially disabled or a malingerer based on the video evidence.

[83] I also would not give effect to the appellant's submission that the trial judge erred by failing to appreciate that Ms. Mayo's efforts to settle the claim on the basis of partial disability were reasonable and that the trial judge made an error in law in failing to ask whether the appellant's decision was made in good faith. The trial judge made an express finding that the appellant's handling of the respondent's claim demonstrated bad faith. There was no doubt as to the respondent's full disability; there was no medical evidence to the contrary.

[84] For all of these reasons, I would not interfere with the trial judge's findings and conclusion relating to punitive damages. [page208]

Mental Distress Damages Award

A. Grounds of appeal

[85] On the issue of mental distress damages, the appellant concedes that there is some entitlement to damages but takes issue with the quantum. A reading of the evidence as a whole does not, in the appellant's submission, support the conclusion that the respondent's mental distress merited a compensatory award in the amount of $100,000.

[86] The appellant submits that the trial judge's reasons on this issue were also deficient. He provided no explanation for the quantum, and failed to reference any of the psychiatric evidence that pointed to bases other than the appellant's failure to pay benefits as contributors to the respondent's mental distress. Nor did he explain why the facts of this case justified a higher award than those in comparable cases or why he departed from the respondent's requested quantum of $25,000 and the appellant's suggestion of $20,000.

[87] The appellant submits that a reasonable range for mental distress damages was between $20,000 and $25,000, and the amount awarded constituted an error in principle.

B. Analysis

[88] In Fidler, at paras. 51-53, the Supreme Court observed that the jurisprudence speaks of two different types of aggravated damages. The court clarified that the term "aggravated damages" is misplaced in a case of mental distress damages arising out of a contractual breach. This was the nature of the damages claimed and awarded in the case under appeal.

[89] In Fidler, the Supreme Court held that damages for mental distress for breach of contract may be awarded "where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made": para. 45.

[90] This does not obviate the need to prove the loss. The court stated, at para. 47:

The court must be satisfied: (1) that an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and (2) that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation.

[91] In that case, the Supreme Court determined that the plaintiff's distress and discomfort arising out of the loss of disability coverage was amply supported by the evidence, which [page209] included extensive medical evidence. The court did not disturb the award of $20,000.

[92] In the case under appeal, it is common ground between the parties that an objective of the insurance policy was to secure a psychological benefit and that, at the time, the parties reasonably contemplated that a failure to pay benefits could cause the respondent mental distress.

[93] As mentioned, on appeal the appellant concedes that there was some entitlement to mental distress damages but takes issue with the quantum of the award.

[94] In his reasons, the trial judge relied on Fidler and McQueen v. Echelon, noting that these decisions had upheld mental distress damages awards of $20,000 and $25,000 respectively.

[95] In the case under appeal, the trial judge's reasoning on the issue of mental distress damages consisted of one paragraph, which is reproduced at para. 64 of these reasons.

[96] Later in his reasons, without elaboration, the trial judge wrote that the respondent was to have judgment for $100,000.

[97] The applicable principles for appellate review of damage awards are described by Viscount Simon in Nance v. British Columbia Electric R. Co., 1951 CanLII 374 (UK JCPC), [1951] J.C.J. No. 6, [1951] 3 D.L.R. 705 (P.C.), at p. 713 D.L.R.:

The principles which apply under this head are not in doubt. Whether the assessment of damages be by a Judge or a jury, the Appellate Court is not justified in substituting a figure of its own for that awarded below simply because it would have awarded a different figure if it had tried the case at first instance. Even if the tribunal of first instance was a Judge sitting alone, then, before the Appellate Court can properly intervene, it must be satisfied either that the Judge, in assessing the damages, applied a wrong principle of law (as by taking into account some irrelevant factor or leaving out of account some relevant one); or, short of this, that the amount awarded is either so inordinately low or so inordinately high that it must be a wholly erroneous estimate of the damage.

(Citations omitted)

[98] This decision has been repeatedly affirmed by this court. See, for example, Barrick Gold Corp. v. Lopehandia (2004), 2004 CanLII 12938 (ON CA), 71 O.R. (3d) 416, [2004] O.J. No. 2329 (C.A.).

[99] In Lumsden v. Manitoba, [2009] M.J. No. 48, 2009 MBCA 18, 236 Man. R. (2d) 130, the Manitoba Court of Appeal reduced the trial judge's mental distress damages award from $45,000 to $35,000 on the basis that it was excessive. The court stated, at para. 72:

[I]n assessing the reasonableness of the award of damages, the trial judge is entitled to significant judicial discretion; only if she erred in principle or if the award is completely out of line and truly excessive (or inordinately low, as the case may be) may an appellate court interfere. [page210]

[100] In the case under appeal, there was no explanation of how the trial judge arrived at the figure of $100,000 or what facts justified such an amount. The award appears inordinately high and entirely disproportionate, where the evidence was that circumstances apart from the appellant's conduct contributed to the respondent's psychological distress. Mental distress damages are to be compensatory, not punitive: Pate Estate v. Galway-Cavendish (Township) (2013), 117 O.R. (3d) 481, [2013] O.J. No. 5017, 2013 ONCA 669. An award of four times that requested by the respondent can only be described as punitive.

[101] Moreover, although not determinative, the parties were also of the view that $100,000 was not an appropriate measure. As noted, the respondent sought $25,000 and the appellant suggested $20,000 in mental distress damages.

[102] In my view, the evidence properly supported the award requested by the respondent, that is, $25,000.

Disposition

[103] In conclusion, I would dismiss the appeal of the punitive damages award. I would allow the appeal of the mental distress damages award and replace the award of $100,000 with an award of $25,000.

[104] In light of the divided success, I would order that the parties each bear their own costs of the appeal. I would also reduce the full indemnity trial costs award by $30,000.

Appeal allowed in part.

[^1]: The appellant states in its factum that it received an undated medical report from Dr. Huth on July 8, 2005. That said, the trial judge does not refer to this report in his reasons and Ms. Mayo's evidence on this report is not definitive. Among other things, the undated report states that Dr. Huth had advised the respondent that he must consider another line of work.

[^2]: Tracy is the respondent's common law spouse.

[^3]: He reiterated this finding in his May 14, 2013 costs award [[2013] O.J. No. 2172, 2013 ONSC 2803 (S.C.J.)], at para. 19, where he wrote: "Penncorp tried mightily to get rid of Avelino. It used his vulnerability in doing so."

[^4]: Whiten refers to "malicious, oppressive and highhanded" conduct at para. 36, but "high-handed, malicious, arbitrary or highly reprehensible" conduct at para. 94. Fidler refers to "malicious, oppressive or high-handed" conduct at para. 62. Given that Fidler is a more recent decision, the use of "or" reflects the proper description of actionable conduct.