Overview
Insurers should pay careful attention to the recent Ontario Court of Appeal decision in Baker v. Blue Cross Insurance Company of Canada.1 The Court’s decision upheld a significant jury verdict in the amount of $1,500,000 in punitive damages and approximately another $1,000,000 in full indemnity fees and disbursements to the plaintiff/insured against her long-term disability benefits insurer.
The Court found that the insurer engaged in a closed loop of information, ignoring information that did not support its coverage denial. There were several examples where the insurer failed to appreciate or clarify evidence contrary to its position, to the point where adverse inferences could be drawn to paint the insurer’s conduct as systemic.
What’s more, the insurer failed to call all prior claims handlers at trial who could explain the rationale behind the coverage denial to potentially counter any adverse inferences. That decision proved even more fatal where the insurer had sought to have the matter tried by a jury, as juries provide no reasons for the appellate court to consider, making it harder to overturn jury awards.
This article provides a discussion of the insurance dispute and key takeaways for insurers and litigants engaged in insurance claims disputes.
The claim
In October 2013, Ms. Baker suffered a stroke and could not return to work as a Director at a Toronto Hospital where she was employed and through which she had disability benefits policy (“Policy”) with Blue Cross Life Insurance Company of Canada (“Blue Cross”).
Blue Cross paid Ms. Baker short-term disability benefits until January 2014 at which time the benefits were terminated. After an internal appeal, the short-term disability benefits were reinstated on March 7, 2014, for 30 weeks.
Once the short-term disability benefits had lapsed, Ms. Baker applied for long-term disability benefits. To receive long-term disability benefits, Ms. Baker had to satisfy an “own occupation” test in the Policy. The “own occupation” provision applied for two years and was defined as “the complete and continuous inability of the Covered Employee to perform the regular duties of his own occupation as result of illness or injury”.2 Blue Cross accepted her application for long-term disability benefits and paid her benefits for two years.
Once the two years passed, Ms. Baker applied for a continuation of her long-term disability benefits. To receive long-term disability benefits at this time, Ms. Baker had to satisfy an “any occupation” test in the Policy, which was defined as follows:
state of continuous incapacity, resulting from illness or injury, which wholly prevents the Covered Employee from performing the regular duties of any occupation for which he:
• would earn 60% or more of his Pre-disability Earnings and
• is reasonably qualified, or may so become, by training, education, or experience.”3
Blue Cross denied Ms. Baker’s claim for further long-term disability benefits pursuant to the “any occupation” test. Ms. Baker appealed Blue Cross’ denials twice internally before commencing her action in the Ontario Superior Court of Justice in June 2017.
Following a five-week jury trial, the jury awarded Ms. Baker retroactive benefits in the amount of $220,604, aggravated damages in the amount of $40,000, and punitive damages in the amount of $1,500,000. The Court later awarded costs on a full indemnity basis in the amount of $1,083,953.50. The punitive damages award, as well as the full indemnity cost award are significant.
The appeal decision
The Court of Appeal rendered its decision on December 20, 2023.
The legal issues at appeal were:
- whether the punitive damages award was justified;
- whether the quantum of the punitive damages award was appropriate; and
(3) whether the costs award on a full indemnity was appropriate.
Before getting into the issues, the Court of Appeal started its analysis by noting that appellate courts have a more limited ability to interfere in jury verdicts than judge verdicts. Appellate courts generally take a more deferential approach to jury verdicts because juries do not provide reasons. However, appellate courts will scrutinize a jury’s punitive damages award with more scrutiny. The standard of review of a punitive damages award, even one from a jury, is the rationality test, which has been stated as follows: “whether the punitive damages serve a rational purpose. In other words, was the misconduct of the defendant so outrageous that punitive damages were rationally required to act as deterrence?”
On the punitive damages issue, Blue Cross took the position that being wrong on its coverage position did not amount to acting in bad faith.4 Blue Cross alleged that it simply applied the wording in the Policy in its denial of Ms. Baker’s long-term disability benefits.
However, the Court noted that the evidence before the jury did not support Blue Cross’ position. The evidence indicated that Blue Cross:
- disregarded evidence from Ms. Baker’s treating physicians;
- engaged in 375 hours of surveillance which did not show Ms. Baker engaging in activities inconsistent with the symptoms of her stroke;
- failed to clarify or address the obvious flaws in a medical assessor’s form;5
- selectively relied on evidence that supported the denial of benefits and ignored conflicting medical evidence;
- distorted a neuropsychological assessment report in a way that supported the denial of Ms. Baker’s benefits and repeatedly omitted caveats to that report in its internal files and communications as well as communications with Ms. Baker;
- distorted a Transferable Skills Analysis report in a way that supported the denial of Ms. Baker’s benefits; and
- persisted in distorting the forms and reports even after Ms. Baker’s lawyer advised them of the errors.
The evidence suggested that Blue Cross’ conduct was likely systemic as the employees who handled Ms. Baker’s file all took the same approach by ignoring her rights under the Policy.6
Further, a strategy that ultimately proved fatal for Blue Cross, both at trial and on appeal, was that it did not call witnesses who could explain their approach to the determinations made on Ms. Baker’s file leading to adverse inferences regarding their conduct.
The Court held that the jurors were properly instructed on the test for determining whether punitive damages are warranted and determining quantum.
Considering the evidence noted above, the Court of Appeal concluded that the “jurors could have concluded that Blue Cross was not just cavalier in treating [Baker’s] claim but that it undertook a deliberate strategy to wrongfully deny her the benefits she was entitled to under the policy”.7
In considering costs, the trial judge found that the rationale established by the jurisprudence justified an award of costs on a full indemnity basis. Where it was found that an insurer wrongfully denied coverage it was unfair and burdensome for plaintiffs to have those benefits eroded by the costs of recovering the benefits to which they were entitled.8 The trial judge ultimately found 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”.9
The Court of Appeal supported the costs award, but not its basis, instead preferring that “trial judges retain their discretion to award costs based on their assessment of the dynamics of the litigation.” The Court of Appeal found that Blue Cross’ conduct and its failure to accept a generous settlement justified the full indemnity costs award.
Analysis and key takeaways
Legal and practical implications flowing from Baker arguably extend beyond disability insurance. Any insurer showing a similar “reckless indifference” to consider an insured’s claim in good faith could risk facing a significant award of punitive damages in Ontario. An insurance policy is a contract of the utmost good faith. This decision underscores that insurers acting in good faith should consider all evidence before them. If they are denying coverage, they should explain why the evidence that runs counter to the denial is ultimately outweighed by evidence supporting the denial.
Naturally, insurers should confirm that reasons for denials are thoroughly supported by evidence before it prior to terminating or denying coverage. At the least, they need to demonstrate that they have considered the totality of the evidence before them.
To respond to Baker, insurers should have methods of claims evaluation that are transparent and fair. Sufficient attention should be paid to all information, not just the points which support a denial. Selective attention paid to evidence which only supports a denial of benefits could increase an insurer’s exposure to punitive damages. The warning to insurers is clear: triers of fact will scrutinize the basis of decisions to deny coverage. If these rationales are unsupported by evidence or otherwise obscured, the risk of a significant punitive damages award is real.
From a litigation strategy standpoint, insurers should not wed themselves to the notion that jury notices are a must. As this case shows, juries could be more prone to American-style verdicts depending on their makeup.
A final point to consider is that when a claim passes through multiple claims handlers, the insurer should not simply rely on the last handler to speak to the claim. That is sufficient on examination for discoveries. However, at trial, a trier-of-fact ought to have the complete record before them. That means calling every claims handler to the stand. Without putting forth all witness evidence, an insurer risks a trier-of-fact making similar adverse inferences against it.
Katherine Di Tomaso, Avi Sharabi, and Linette King are lawyers at Stieber Berlach LLP in Toronto, Ontario. Katherine Di Tomaso is Chair of the OBA Insurance Law Section and is an Executive Member of the CBA Insurance Law Section.
End Notes
6 Blue Cross Appeal at 35.
8 Baker v. Blue Cross, 2023 ONSC 1891 [“Baker Costs Endorsement”] at 11-16.