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By: Steve Rastin
This paper is not meant to be an academic treatise, but rather a practical guide for litigators who may be considering devoting a larger part of their practices to long-term disability litigation. For many plaintiffs' counsel, LTD lawsuits have been an off-shoot of acting for victims of motor vehicle accidents. However, as the Ontario workforce ages, there is a significant likelihood that the number of workers finding themselves disabled and claiming LTD benefits will increase. The recent elimination of the mandatory retirement age in Ontario may also contribute to this trend. More disgruntled workers will complain of being wrongfully denied long-term disability benefits. It is simple mathematics. More claims will lead to more disputes. In an era when legislative changes increasingly impair the ability of motor vehicle accident victims to obtain full compensation, there is good reason to believe that LTD litigation will naturally become a more prominent aspect of the civil dockets.
LTD litigation remains dynamic. Ten years ago, jury notices were barred in LTD actions in Ontario; now they are common1 The doctrine of bad faith has taken root in LTD litigation. Insurers are constantly developing new and innovative arguments which have the potential to defeat a claimant's action for benefits.
Tactics and strategy are essential weapons for the claimant and his/her lawyer as they cross blades with some of the largest insurers in Canada in these disputes.
With this in mind, we would like to offer some practical suggestions that many lawyers may consider useful as they litigate in this area. Please note that these suggestions are by no means comprehensive or exhaustively discussed in this paper, and they are raised here simply to give you ideas that might be helpful in building your clients' cases.
TIP #1: OBTAIN EARLY DISCLOSURE OF THE ACTUAL DISABILITY POLICY AND THE LTD INSURER'S CLAIMS FILE
Unlike motor vehicle claims, there is no standard long-term disability policy of insurance. Policies vary from insurer to insurer and from client to client. The scope of benefits offered by LTD policy are directly related to the premiums paid. The standard policy offers benefits for two years, while the claimant is disabled from his/her own lob and then offers benefits until the age of 65, if the claimant is disabled from any occupation for which he/she is qualified by education training or experience (the so called "any occupation" clause). Depending on the policy, benefits will entail payment of a percentage of the workers' normal wage (usually varying from 60% to 75%), but benefits may also include additional items like waiver of LTD and life insurance premiums, rehabilitation and retraining assistance and contributions to the workers pension plan. We recommend that you obtain disclosure of the policy as soon as possible to ensure that you are claiming everything that the worker is entitled to under the policy.2
Further, obtaining the policy will allow you to calculate the monthly benefit to which your client is entitled. The policy will also set out the test for entitlement. Most policies rely on the "any occupation" test for entitlement after two years, but many policies have interesting variations on the themes; for example, "any occupation" is sometimes defined as an alternative occupation that will pay at least 60% of the claimant's pre-disability income. Other policies contain appeal procedures and contractual limitation periods that are, in some cases, longer than the statutory limitation periods. A careful examination of the policy at an early stage will often help you quantify the claim, determine the threshold for entitlement, and allow you to draft a more focused Statement of Claim.
We also recommend that you write to the LTD insurer and request complete production of the claimant's file. In our experience, the insurer seldom produces the entire file prior to litigation, but they do routinely provide the medical and correspondence files.3 Again, an examination of this information will often tend to clarify the issues in dispute and give you a good idea of how to draft the Statement of Claim and what matters will need to be proved to carry the litigation.
Early disclosure of the policy and insurer's file will also give you the opportunity to evaluate the case before you embark on full-blown litigation. In some cases, it may be that the insurer was justified in terminating benefits, and it is clearly preferable to find this out before counsel has been put to the work and expense of drafting a claim and conducting Examinations for Discovery, only to determine that the claimant does not have a viable case.
TIP #2: CONSIDER WHETHER TO OBJECT TO MULTIPLE ROUNDS OF INSURER MEDICAL EXAMINATIONS
Pursuant to the Rule 33.01 of the Rules of Civil Procedure and s.105 of the Courts of Justice Act, a defendant is entitled as of right to compel the plaintiff to submit to a medical examination. However, what is the impact of medical examinations conducted prior to the issuance of the Statement of Claim? It is not uncommon for insurers to require regular medical examinations while a person is "on claim." When a claim is denied, insurers have generally placed the onus for gathering additional medical information on the claimant, at his/her expense.
A common exception to this practice seems to occur after the insurer becomes aware that the claimant has retained counsel and is considering litigation. It is our common practice to write a letter asking for the file before suing. This allows us to evaluate the file and to determine if there is any evidence of improper conduct that should be specifically pleaded in the Statement of Claim. In some cases, however, LTD insurers have responded to a request to produce the file by sending the claimant to another round of medical examinations. If the examinations support disability, benefits are reinstated and the insurer avoids litigation.
If benefits are not reinstated, LTD insurers will routinely schedule another round of medical examinations. Be advised, however, that Zinchuk v. Unum Provident of Canada,4 stands for the proposition that a second round of medical examinations should not be granted. In this case, Zinchuk's mental health was in question. Unum conducted three psychiatric examinations, in 1996, 1999, and 2002. Benefits were terminated shortly after the last examination, and the Statement of Claim was issued in 2003. Unum relied on Tsegay v. McGuire5 which allowed a fresh examination after a tort action was started notwithstanding that the defendant had conducted two examinations prior to issuance of the claim. However, Master Egan preferred to follow a line of cases flowing from Binns v. Skinner Estate6 where Justice MacDonald refused to allow the same insurer to have separate examinations for accident benefits and statutory third party purposes. MacDonald,J. stated, I am of the view, therefore, that a prior medical examination under one statute or its regulation is relevant to the question of whether a medical examination properly may be ordered under the other statute or its regulation.
Masters and Judges seem wary of allowing insurers to bolster their case when they have already had the benefit of choosing to send a claimant to the doctor of their choice and to make a decision regarding payment of benefits based on that examination. While the Zinchuk decision is clearly beneficial to claimants, this matter is far from decided.8
TIP #3: FILE JURY NOTICES
In our experience, insurance companies have always been somewhat reluctant to put their fate in the hands of juries. Defence counsel routinely file jury notices in personal injury lawsuits, but in those cases they defend in name of the defendant rather than the name of the insurance company. It is strictly forbidden to inform the jury that the defendant has the benefit of insurance, and in fact, even raising the issue of insurance is sufficient to cause a mistrial. The concern, as I understand it, is that juries will be more inclined to find for plaintiffs if they belief that rich insurance companies will be paying the claims rather than the negligent defendant. Thus, in personal injury trials, everyone in the courtroom except for the jury knows the truth, but we all play our part in accordance with the Rules.
The situation is different, however, in long-term disability cases where the defendant IS the insurance company. In these cases, the insurance company is the party listed on the Statement of Defence and Defence counsel is obliged to admit that de facto he is acting for, and is paid by, an insurer. Insurer's have understandably been concerned about this level of frankness, until the late 1990s their response in Ontario was to deal with the problem by not allowing jury notices in cases relating to the non-payment of long-term disability benefits. Relying on a line of cases flowing from Justice Chadwick's decision in MacLennan v. National Life,9 insurers routinely struck out jury notices on the basis that LTD lawsuits were, in pith and substance, claims for declaratory relief and barred by section 108 of the Courts of Justice Act. However, that line of cases was over turned by two decisions, HaskiII v. London Life10 and Ramm11 which both found that LTD lawsuits are nothing more or less than lawsuits for breach of contract and as such there should be no bar to a jury hearing the case. This decisions afford plaintiffs' counsel in LTD cases the rare luxury of being able to proceed against a named insurance company with the benefit of a jury in LTD cases where benefits may have been wrongly denied.
You many not want a jury notice on all files, but if you do intend to file a jury notice in an LTD case, we recommend the following:
As a result of the above and changes to the way claims are drafted, we now routinely file jury notices without objection in LTD cases.
TIP #4: BE WARY OF ADVANCING CLAIMS FOR UNIONIZED EMPLOYEES
An important point to consider when taking on a new LTD file is whether your potential new client is unionized. Where there is no union involved, LTD lawsuits always proceed by way of lawsuit. However, depending on the wording of the Collective Bargaining Agreement (CBA), LTD claims involving unionized workers MAY need to proceed through the arbitration procedures set out in the CBA. When dealing with unionized workers, counsel needs to examine the wording of the CBA. The Ontario Court of Appeal provides guidance on how to deal with the question in London Life Insurance Co. v. Dubreuil Brothers Employees Assn.13 Mr. Justice Gouge ruled that the fundamental test about whether an employee can sue in the Courts or must arbitrate is whether the union and the employer intended that the facts in dispute be governed by the CBA. The Court relied upon the test set out in Canadian Labour Arbitration by Brown and Beatty,14 which applies a four-fold test:
Notwithstanding this clear statement of principles, the matter was recently litigated again in Morris v. Manufacturers Life Assurance Co.15 In this case, Manulife and City of Toronto were successful in having the LTD claim struck in a situation where the CBA clearly sets out the essential terms of the disability contract and the Group Benefits Contract clearly specified "No legal action for the recovery of any claim may be brought against Manulife" and directs that claims for benefits should be brought against the City of Toronto.16 It is worth noting that the city and insurer tried to split the claim so that the negligence, bad faith and punitive damages claims would remain in the Court; however, the Judge refused to allow this and held that the City was liable for any misconduct on the part of its agent Manulife and the entire matter should be arbitrated.
While it is clearly open to employers and LTD carriers to draft collective bargaining agreements so as to require arbitration rather than litigation, one has to question whether this course of action is in the best interests of anyone concerned. Labour arbitrators are generally unaccustomed to dealing with disability cases and the arbitration process is not generally well suited to this type of litigation in any respect. Unions have begun to consider hiring personal injury lawyers to deal with these sorts of cases. Parties will have to consider, however, the actual wording of the collective agreement before litigating unionized LTD claims to ensure that the Court has proper jurisdiction.
TIP #5: DETERMINE WHETHER THE LTD BENEFIT IN QUESTION IS A TAXABLE OR NON-TAXABLE BENEFIT
It is important to remember that their LTD benefits may be either taxable or non-taxable benefits. Generally, if the employer pays the LTD insurance premiums, the benefit will be taxable. If the employee pays for the LTD insurance premiums,17 then the benefit is non-taxable. Given the clear advantage in making this a non-taxable benefit, it is surprising that all employees don't pay their own premiums. While the majority of LTD insurance plans are, in our experience, non-taxable there are a surprising number of policies that provide for taxable benefits especially in the public sector. When cases involving taxable benefits are settled, insurers will not deduct money from the settlement, but rather they will simply issue a T4A in the January or February of the following year. Failing to warn a client about this tax liability will expose counsel to an irate complaint at best or an LAWPRO claim at worst.
In the litigation context, non-taxable LTD policies are easy to deal with. If the original benefit was non-taxable, then any damage award or settlement is also non-taxable.
Matters are considerably more complex, however, when dealing with taxable benefits. Over the last several years, there have been a number of cases in the Tax Courts dealing with the question of whether lump-sum settlements of LTD claims should properly be taxable as income. The Supreme Court of Canada appears to have finally resolved the issue in the recent decision of R. v. Tsiaprailis.18 In this case, the CCRA originally assessed the entire settlement (including past and future benefits) as taxable. The Tax Court found the settlement was not taxable; however, the Federal Court of Appeal disagreed and ruled the entire settlement was subject to tax. In a 4-3 split decision, the Supreme Court of Canada ruled that the portion of the settlement intended to replace past disability benefits was subject to tax, while the portion of the settlement intended to resolve any future potential claims and any bad faith or aggravated damages claim, should not be subject to tax.
In practical terms, this means that when negotiating a settlement, Counsel should attempt to have the insurer characterize as much of the settlement as possible as compensation for settlement of potential future claims. Note that the breakdown must be reasonable. Also note that even for past benefits, Counsel should get the insurer to issue 11198 forms to attribute the settlement over a number of years and the plaintiff should re-file recent tax returns to spread out the tax hit. Finally, remind the client that legal costs are a proper deduction that may be used to off-set the tax hit associated with taxable benefits.
TIP #6: BE AWARE OF PITFALLS RELATED TO LIMITATION PERIODS AND PROVING DISABILITY DURING THE RELEVANT QUALIFYING PERIOD
Winning in LTD litigation is about more than proving your client is disabled according to the terms of the policy. LTD litigation seems simpler than motor vehicle cases because you don't need to worry about liability questions. There are a host of arguments, however, that an insurer can raise to deny entitlement. Some concerns such as failure to mitigate or misrepresentation will be familiar to motor vehicle litigators; however, some arguments based on entitlement and qualifying periods are unique to LTD litigation.
A common defence tactic in LTD litigation is to argue misrepresentation. Insurers have relied upon failure to disclose and misrepresentation to deny numerous claims. Consider the leading Court of Appeal decision of Gregory v. Jolley, Aetna Life Insurance et al19 In this case, Gregory asserted a claim for disability benefits and was successful after a 19 day trial, notwithstanding that the trial judge found he had misrepresented material facts relating to his medical condition and income. The trial judge's decision was based on his conclusion that there was no evidence of fraud, and therefore, the incontestability clause applied. This clause, which is common to most policies, holds that an insurer cannot void a policy for misrepresentations after two years from the application for insurance in the absence of fraud. The decision was overturned by the Ontario Court of Appeal which found that Gregory had misled the insurer with respect to his medical conditions and had grossly overstated his income. He was in fact losing money and not making the six digit income he claimed. The Court found that the misrepresentations were sufficiently reckless as to be considered fraudulent in the civil sense. The result of the insured's failure to disclose material facts or act in good faith, therefore, made the policy voidable and Aetna was not obliged to pay any benefits even though Gregory was profoundly disabled.
Material misrepresentation is routinely pleaded by insurers. In cases where clients have filled out an application for insurance (which will likely not happen in group policy situations), counsel should get a copy of the application early in the process and go over the form with the client line by line to look for any possible inaccuracies. Remember that innocent mistakes are treated differently at law than fraudulent misrepresentations.
Limitation and Qua!intim Period Issues
Often LTD insurers will provide a relative short appeal window when they set out a denial letter. Many letters typically give claimants 60 or 90 days to appeal failing which the insurer will close its file. We have had several instances where claimants, for whatever reason, don't take action within this appeal window and then conclude that they have missed the opportunity to appeal the decision to deny benefits. In some cases, claimants will wait months if not years before consulting a lawyer.
If you are consulted by a claimant, it is important to actually see a copy of the denial letter. The stated appeal window on the letter is not determinative, but unless you have evidence to the contrary, you should assume that you are governed by the standard limitation period. It is worth noting that historically LTD claims were governed by Statutory Condition 12 of the Insurance Act which required that an action be commenced within one year after the date the insurance money became payable or would have become payable if it had been a valid claim. However, changes to the Limitation Act,20 have brought claims of this nature within the standard two-year limitation period.21 Section 22 holds that there is no contracting out of the two-year limitation period in the Act unless the agreement was made before the Act came into force.22 It remains to be seen whether contractual limitation periods of less then two years contained in long-standing LTD policies will stand up pursuant to this provision.
It is important to obtain the termination letter because some policies have extended notice periods. We have encountered one large insurer that regularly incorporates a two year appeal period.23
Even if a client has missed the limitation period, Morgan v. Dominion24 is the root case in a long line of authority that stands for the proposition that benefits cannot be denied until they become due, and claimants therefore have a rolling limitation period in which to claim benefits. If a potential client comes into your office after the expiry of a limitation period, it is important to immediately issue a Notice of Action to preserve the claim to as much of the arrears as possible.
In situations where the client has improved over time, however, Morgan may not be able to help you. In order for a client to qualify for benefits, it is necessary to prove that he/she was disabled during what is commonly referred to in policies as 'The qualifying period." It is not enough to prove that your client is disabled as of the date of trial, you must also prove that he/she was disabled as of the end of the qualifying period. Consider, for example, Lyons v. Canada Life Assurance Company25 where the jury awarded the plaintiff six months worth of disability benefits covering a six month period in 1995 even though the claim was not commenced until November 1998. The Court of Appeal overturned the award, primarily on the basis that an award for benefits for this time period was barred by the limitation period in the policy.26 Plaintiff's counsel attempted to defend the decision using the discoverability principle, but that argument was doomed to failure because the trial judge did not reference discoverability in his charge to the jury.
A better example of the "qualifying period" pitfall at work is Martin v. Manufacturer's Life Insurance Company.27 Martin injured herself in a ski accident in April 1998. She did not submit a claim until October 2001, and it was denied in January 2002 due to "late filing." In June 2003, she commenced an action. Justice Bouck conducted a detailed analysis of the policy and concluded that Martin was obligated to file a claim within a specified period of time after the injury. Further, to succeed she needed to prove that she was totally disabled from working within the qualifying period. In Martin's case, the evidence showed that she was not disabled during the qualifying period, but only became disabled later when she ceased working in order to undergo surgical treatment However, this later period of disability was found irrelevant. Because there was insufficient proof that Martin was disabled during the qualifying period, the claim was dismissed.
The risk of being found to have become disabled after the end of a qualifying period is significant especially in cases where individuals are suffering from degenerative problems, have been terminated from their employment, and do not seek legal advice for an extended period of time after benefits are denied.
TIP #7: CHOOSE THE INSURER REPRESENTATIVE TO EXAMINE CAREFULLY AND NEVER EXAMINE THE 'LITIGATION CLAIMS SPECIALIST'
The choice of who to examine in LTD litigation may be a critical decision. Many LTD insurers have professional witnesses who travel the country appearing as the representative of the defendant at Examinations for Discovery. These witnesses will have no direct experience with the file or your client. Generally speaking, examining these witnesses is of limited value. If you have a legitimate bad faith case, examinations of this sort are a complete waste of time.
My practice is to require a sworn Affidavit of Documents with Schedule "A" productions BEFORE I advise the insurer of the person I want to examine. LTD insurers are usually good about providing you with internal correspondence. We try to identify the lowest decision maker on a file that had a significant role in the decision to terminate benefits. Examination of the decision maker may give you first hand information that you would never obtain by examining the insurer's professional witness. For example, a couple of years ago, after reviewing the production documents, we determined that the decision maker on a file was a claims representative based out of Florida. I required that she be produced in Canada and under examination she admitted that she had a grade 12 education, no medical training, no training manual, no understanding of Canadian law, no knowledge of what "CPP disability" was, had never met my client, and did not bother to even schedule a medical before terminating benefits because "we don't do that down in Florida."
Asking the insurer to produce the decision maker may also assist you in determining whether the LTD insurer has farmed out the file to a claims handling company. This practice, which has only recently come to light, involves situations in which large Canadian insurers have contracted with independent companies, usually American, to assist and/or take over claim handling of some files. Clients have complained that the claims handling practices in some of these cases have been very aggressive. A warning bell should sound if you are told that the decision maker is not an employee of the insurance company. Claims handling is a high-turn-over industry and the adjuster may have left; however, the adjuster may NEVER have worked for the LTD insurer in the first place. You need to determine if that is, indeed, the fact. If necessary, find out the identity of the independent claims handling company and add it as a party to your action.
TIP #8: PROCEED WITH PUNITIVE DAMAGES CLAIMS SPARINGLY BUT FEARLESSLY
The Supreme Court of Canada's judgment in Fidler V. Sun Life Assurance Company of Canada28 should cause the plaintiff's bar to reconsider how we have been dealing with punitive damages in the context of LTD litigation. In Fidler, the Court affirmed the trial judge's $20,000 award for aggravated damages, but at the same time, overturned the $100,000 punitive award imposed by the British Columbia Court of Appeal. Faith Hayman, who was counsel on Fidler, will discuss the implications of Fidler in more detail in her paper. From our perspective, suffice it to say that Fidler provides guidance from the Supremes on both the applicability of aggravated damages for what have become known as "peace of mind contracts" and the availability of punitive damages in the insurance context.
It is important to remember that what the Supremes did in this case was to restore the decision of the trial judge that had been modified by the BC Court of Appeal. The Court spent a fair amount of time reviewing the purpose of punitive damages and the general reluctance that the Courts should exercise in awarding those damages.
The Court made specific note of the fact that the trial judge carefully and fully considered all of the evidence before coming to the conclusion that the actions of Sun Life, although troubling, did not meet the criteria for bad faith and therefore there was not an independent actionable wrong upon which to ground a claim for punitive damages.29 The Court of Appeal overturned the decision because it found "palpable and overriding error on the question of bad faith."30 The decision of the Court of Appeal was based on three considerations: (1) there was an absence of medical evidence to justify denying the claim; (2) Sun Life exaggerated the surveillance results in order to avoid looking 'bad' in the event of litigation, and (3) Sun Life failed to disclose the surveillance video to the plaintiff. The Court of Appeal also chose to regard Sun Life's eleventh hour decision to reinstate benefits with interest as "the civil equivalent of a guilty plea."
The Supreme Court of Canada shared these concerns and agreed that Sun Life's conduct was "extremely troubling" and "the five year denial by Sun Life of disability benefits without medical support for the denial is, to say the least, inappropriate."31 However, the Supreme Court nevertheless overturned the Court of Appeal and restored the decision of the trial judge where punitive damages were not awarded. Chief Justice McLaughlin rejected the idea that reinstating benefits was akin to a guilty plea. Further, for all the misdeeds of Sun Life, the test for punitive damages was reduced to,
Whether the denial was the result of the overwhelmingly inadequate handling of the claim, or the introduction of improper considerations into the claims process.32
In deciding whether this standard had been breached, the Court decided that the proper approach was deference to the trial judge who had carefully considered "every salient aspect of how Sun Life handled the claim including those actions found objectionable by the Court of Appeal. Since the trial judge did not find an improper purpose on the part of Sun Life, the higher courts should not interfere.
It is respectfully submitted, however, that the reversal of the punitive award was not as much an attempt to rein in punitive damages awards as an effort to reinforce the importance of judicial deference. At the conclusion of the analysis, the Court noted,
Sun Life's conduct was troubling but not sufficiently so as to justify interfering with the trial judge's conclusion that there was no bad faith. The trial judge's reasons disclose no error of law, and his eventual conclusion that Sun Life did not act in bad faith is inextricable from his findings of fact and his consideration of the evidence.33
In other words, we would argue, the finding of bad faith in any given case is driven by the facts of that case which are best appreciated by the trial judge. Appellant Courts ought to refrain from interfering with the factual findings and conclusions that ground a determination into whether an insurer's conduct constitutes bad faith unless there is a clear error of law. It is at least arguable that the Supreme Court would have been just as likely to support a finding of bad faith conduct in the Fidler case if that had been the finding of the trial judge.
The insurance industry has, however, chosen to view Fidler as having a much more profound impact on the role of punitive damages in insurance litigation cases. In one recent article,34 a leading insurance defence lawyer argued that it was significant that even in the face of a finding that Sun Life's conduct was "extremely troubling", the Supreme Court still failed to support punitive damages. This led to the following statement which sets out the defence position regarding the importance of Fidler
This case is important because it emphasizes that punitive damages for bad faith are available only in exceptional cases and that the court must exercise restraint in that regard. It is only where there is overwhelmingly inadequate handling of the claim or the introduction of improper considerations into the claims process where a conclusion of bad faith might be warranted. In an environment where claims for bad faith punitive damages have become standard fare in coverage enforcement litigation, the Supreme Court's reminder of the rarity of such awards is timely.35
It is difficult to envision many cases where punitive damages will be awarded if this standard is actually applied to insurer's conduct. Of course, this analysis completely ignores the fact that bad faith damages are a separate actionable wrong and may also be awarded in cases falling short of punitive conduct. It is difficult to accept, however, the Supreme Court did not see fit to intervene in a situation where a claim was wrongfully denied without supporting medical evidence for almost five years. Plaintiffs' counsel should, in our view, attempt to distinguish Fidler on the basis that what constitutes unreasonable action should be decided on the unique facts of each case and other decisions are therefore of limited value.
TIP #9: ALWAYS PLEAD AND ARGUE CLAIMS FOR AGGRAVATED DAMAGES AND CLAIMS FOR MENTAL DISTRESS FOR BREACH OF CONTRACT
The insurance industry has focused on the punitive damages section of Fidler, but the Court actually spends the majority of its time dealing with the interesting question of when it should allow damages for mental distress for breach of contract. In their attempt to provide some clarity to this area of the law, the Supremes appear to have streamlined the process of obtaining damages for intangible losses resulting from the breach of peace of mind contracts.
The Chief Justice starts by noting the obvious statement that damages for breach of contract should place the plaintiff in the same position, as far as money can, as if the contract had been performed.36 The seminal case to consider is the 1854 decision of the Court of the Exchequer, Hadley v. Baxendale.37 This case established the basis of the modern law of damages regarding breach of contract. Contract damages should be "such as may fairly and reasonably be considered either arising naturally ... from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties." McLaughlin, J. goes on to note that damages for mental distress should be a sort of damage that could be awarded pursuant to Hadley V. Baxendale, however,
Until now, damages for mental distress have not been welcome in the family of remedies spawned by this principle. The issue in this appeal is whether that remedial ostracization continues to be warranted.38
The Chief Justice notes that Hadley v. Baxendale makes no distinction between the types of losses that are recoverable for breach of contract. The Courts have made awards for some non-pecuniary losses arising from breach of contract, but "they have traditionally shied away from awarding damages for mental suffering caused by the contractual breach."39 After reviewing the history of the law she concludes that the refusal to extend the foundational concept of reasonable expectation to include mental distress is a "ceiling" imposed due to considerations of policy.40
Instead of viewing mental distress damages as reasonable expectation damages, the Courts have historically resorted to an artificial distinction called the "peace of mind exception" to the general rule against recovery for mental distress in contract breaches. Damages of this nature have tended to be characterized as aggravated, rather than expectation damages and many cases have either required that plaintiffs demonstrate a separate actionable wrong to ground a claim for aggravated damages for mental distress or have declined to award those damages at all.41
Why does it matter whether mental distress damages are characterized as aggravated or expectation damages? Well for one thing, expectation damages are a much more ordinary remedy. Expectation damages ought to be awarded every time a contract is breached and are not contingent on some extraordinary event. Consider, for example, that in Fidler, Sun Life relied upon older authorities and argued that mental distress damages could only be awarded where the plaintiff could establish a separate actionable wrong. In Fidler, the Supremes rejected this position. They elaborated on the concept first discussed in the earlier decision of Vorvis V. Insurance Corporation of British Columbia:42 damages for mental distress in "peace of mind" contracts should be seen as an expression of the general principle of compensatory damages as set out in Hadley v. Baxendale rather than as an exception to that principle.43
This begs the question of when should damages for mental distress for breach of contract be awarded? The concept that damages for mental distress may be awarded for breach of contract in some cases dates back to Lord Denning and the famous decision of Jarvis v. Swans Tours Ltd.44 In England the House of Lords has relaxed the so called peace of mind exception to permit recovery of mental distress not only when pleasure, relaxation or peace of mind is "they very object of the contract" but also when it is a "major or important object of the contract."45 In Canada, damages for peace of mind contracts have been awarded for breach of vacation contracts, wedding service contracts, luxury chattels, and disability contracts. The Chief Justice sites with approval the recent position taken by the Ontario Court of Appeal that contractual damages for mental distress may be appropriate whenever peace of mind is the "very essence" of the prornise.46
The Supreme Court provides some guidance as to when damages for breach of contract should be awarded pursuant to the application of the principle in Hadley v. Baxendale. The Court should first ask, "what did the contract promise?" If the promise was broken, the Court should provide compensation. Damages for mental distress should flow as long as they were in the reasonable contemplation of the parties. The Court notes,
It does not follow however that all mental distress associated with a breach of contract is compensable. In normal commercial contracts, the likelihood of a breach of contract causing mental distress is not ordinarily within the reasonable contemplation of the parties. It is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration. The matter is
otherwise, however, when the parties enter into a contract, an object of which is to secure a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time when the contract was made. The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security.47
The Court goes on to note that in order to advance a case of this nature, any plaintiff will have to prove that:
a. 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
b. that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation.
Plaintiffs' counsel hoping to advance a case for this type of loss would be well advised to lead evidence on both the plaintiff's reasons for entering into the contract and the impact that the breach of the contract has had upon the mental well-being of the plaintiff. In my office, our practice has been to use a psychologist to prove those losses.
It is important to realize that in Fidler the Court is signaling a sea-change in the way we have been visualizing this type of damages. The term aggravated damages has been used ambiguously in the case law and academic writing.
True aggravated damages, according to the Supreme Court, rest on a separate independent cause of action - usually in tort - like defamation, oppression or fraud. Damages of this nature do not arise out of any breach of contract and are not related to contractual damages under the rule in Hadley v. Baxendale. Damages for mental distress for breach of peace of mind contracts - such as LTD contracts - are expectation damages "based on what was in the reasonable contemplation of the parties at the time of contract formation. They are not true aggravated damages awards."48 Given this new formulation of this type of damages, information related to the representations of the parties at the time of contract formation will likely become more important. Advertising, representations, benefit handbooks, and promises made by the insurance company to the employer and the employees should be examined when building this portion of the case.
TIP #10: ALWAYS FOCUS ON THE ENTITLEMENT TO BENEFITS ADJUDICATION PROCESS
Lawyers that focus on motor-vehicle litigation in Ontario will be accustomed to our current no-fault system where the accident victim is subjected to an endless stream of medical assessments from the treating doctors, the tort defendant, the accident benefits insurer, and your own medical legal assessments. While the medical reports will often be contradictory, any significant case will generate dozens of medical reports.
The LTD process, however, is often completely different. LTD insurers take the position that it is the responsibility of the claimant to prove entitlement both at the initial application stage and during the change of definition stage the "any occupation" test. LTD insurers will typically write to the treating physicians for their clinical notes & records and sometimes even brief medical reports, but they rarely schedule Independent Medical Examinations when determining entitlement. Initial determinations are therefore usually based solely on the insurer's evaluation of the medical documentation generated from the treating physicians.
The process related to the termination of benefits is often similar. Insurer's will send consultants to meet with the claimant to assess level of function and transferable skills, but our experience is that they seldom arrange for their own medical assessments. It is common to have consultants who never meet the claimant conduct paper-review Transferable Skills Assessments. It is also common to have in-house medical consultants (often general practitioners) provide opinions concerning level of disability and transferable skills. Our experience is that where these opinions conflict with the opinions of the treating doctors, the in-house medical consultants' opinions will be preferred (often to the detriment of the claimant). We have also come across numerous cases where benefits were terminated based on surveillance that was never even vetted through any medical consultant.
Another common tactic is to harass the claimant's treating doctors to the point where they simply wash their hands of the matter. For instance, on a recent file, after writing the family doctor for the eighth time to try to get her to agree that my client could work, the family doctor replied,
I believe that I have written quite plainly that this man is unable to operate motorized vehicles in the pursuit of employment. I therefore see that probably fixing small engines if they were going would not be equally as safe. I believe that you will keep on looking for your answer with different doctors until you get the answer you want. I suggest that I am not a specialist in the area of cardiology and you should ask his cardiologist these questions. As for my past experience with Great West Life, a GP's opinion is not good enough. I feel like you are leading this patient on a wild goose chase. Start off with the person you want the answer from in the first place, which would be the cardiologist.
At examination for discovery on this file, the adjuster and defence counsel took the position that this letter constituted an admission by the family doctor that she was not qualified to comment on GWL's questions and her earlier assertions that my client was totally disabled were therefore irrelevant.
In my view, the key consideration in any LTD case is a determination of whether the decision to terminate/never pay benefits was made in good faith and was based on good and sufficient information. Especially in cases where benefits were paid for some period of time, the decision to terminate those benefits without the benefit of ANY treating physician's opinion that the claimant can work should be viewed with suspicion. Paper-reviews conducted by in-house employees or consultants also merit serious scrutiny.
LTD insurers continue to take the position, in my view, that the claimant is under a continuing obligation to prove that he/she continues to be entitled to benefits; however, a better question to ask is why, after paying benefits for some period of time, has the insurer now come to the determine that it is right and fair to terminate those benefits? I believe that a close and vigorous challenge of the decision to terminate benefits will get the attention of the jury and result in exposure to the insurer.
LTD litigation is likely to be an expanding area of the law in Ontario. Claimants have historically been disadvantaged by the fact that the LTD insurers write and interpret the policies. However, recent cases show that the Courts are becoming more likely to recognize this long standing situation of power-imbalance which may operate to the detriment of insurers. We hope that the practical tips and suggestions contained in this paper will assist plaintiffs' counsel considering expanding their practices into this interesting area of the law.
1 M. Steven Rastin, "Judge or Jury: Where to Turn for Insurance Claims", 1998 OTLA Spring Conference, Day II, Tab 2 and Ramm v. Sun Life Assurance Company of Canada (1999), 43 O.R. (3rd) 652 (Gen. Div.) [Ramm]
2 Our experience is that LTD insurer's will often refuse to produce the policy as they allege that the policy is the 'property' of the employer. The LTD insurer will require us to obtain the policy directly from the employer. However, once litigation is commenced, the policy is usually item #1 in the Defendant's Affidavit of Documents.
3 Although they do often refuse to produce any internal medical documents and independent medical examination reports they have on file.
4  0.1. No. 321 Vinchuld
5 (2000), 1 C.P.C. (5th) 311 (Ont. S.C.J.)
6  0.1. No. 3739 (S.C.J.)
7 Ibid, at para. 14; See also St. Pierre v. Liberty Mutual Insurance Group,  O.J. No. 5973, affirmed on appeal at  O.J. No. 5356 (S.C.J.) and Ebrani v. Citadel General Assurance,  O.J. No. 6279 (Gen. Div).
8 Note that as of the date of this paper, the Zinchuk decision had not been judicially considered.
9 (1994), 28 C.P.C. (3d) 35 (ON. Gen. Div)
10 O.J. No. 6044 (Gen. Div.)see M. Steven Rastin, "Judge or Jury: Where to Turn for Insurance Claims", 1998 OTLA Spring Conference, Day II, Tab 2 for a more detailed discussion of this case. See also Cullen v. Sun Life of Canada,  O.J. No. 1625 which cites Haskill leave to appeal decision with approval and follows Ramm.
11 Supra, note 1.
12 I am indebted to OTLA member Andrew Kerr for suggesting this paragraph which he has been incorporating into his long-term disability claims for some time.
13 (2000), 49 O.R. (3d) 766 (Ont. C.A.).
14 Canadian Labour Arbitration, 3rd ed., (1988) (loose-leaf).
15  O.J. No. 712
16 Ibid, at para 22.
17 Generally, the premium will be deducted from the employees paycheck and forwarded to the insurer by the employer on behalf of the employee.
18  T.C.J. No. 856, reversed in Federal Ct,  F.C.J. No. 431, Federal Ct. decision varied,  S.C.J. No. 9.
19 (2001), 54 O.R. (3d) 481,201 D.L.R. (461) 729, 147 O.A.C. 336 (Ont. C.A.)
20 Specifically, s.39(4) of the Limitation Act, 2002, S.O. 2002, c.24, repealed Statutory Condition 12. Schedule B, Section 4 now governs.
21 See the most recent LawPro limitations chart, s.v. "Accidents and Sickness." Note however, that for the new limitation to apply to claims, it needs to have been DISCOVERED before January 1, 2004.
22 January 1, 2004.
23The Great-West Life Assurance Company of Canada
24(1980), 31 O.R. (2'1) 285 (H.C.J.) [Morgan]
25 (2002), 22 C.C.E.L. (3d) 217, (2002) 166 O.A.C. 299, CanLII 18089.
26 The Court also overturned the award of $235,000 aggravated and $25,000 punitive damages.
27 (August 2004, Bouck,J., 2005 BCSC 528 (CANLII)).
28 (2006) SCC 30 (Cani II),  S.C.J. No. 30. [Fidler]
29A requirement established by the Supreme Court in Whiten v. Pilot Insurance Co., 2002 SCC 18 (CanIJI),  1 S.C.R. 2002.
30 Supra, note 28, at para 67
31 Supra, note 28, at para 71
32 Supra, note 28, at para 71.
33 Supra, note 28, at para 75.
34 Nigel Kent, "Fidler v. Sun Life Assurance to keep punitive damages rare," in The Lawyers Weekly (August 11, 2006) at page 10.
35 Ibid., p. 11. (emphasis mine)
36 Supra, note 28, at para 27.
37 (1854), 9 Ex. 341, 156 E.R. 145 at 151
38 Supra, note 28, at para 28
39 Supra, note 28, at para 31.
40 Consider Bingham.L,J in Watts v. Morrow,  1 W.L.R. 1421 (CA) at p. 1445, "A contract breaker is not in general liable for any distress, frustration, anxiety, displeasure, vexation, tension or aggravation which his beach of contract may cause to the innocent party. This rule is not, I think, founded on the assumption that such reactions are not foreseeable which the surely are or may be, but on considerations of policy."
41 Fidler, supra, paragraphs 32-37; especially see Addis v. Gramophone Co.,  A.C. 488 (ILL.)
42 1989 CanLII 93 (SCC),  1 S.C.R. 1085
43 Fidler, supra, paragraph 43.
44  1 All E.R. 71 (C.A.)
45 Fidler, paragraph 40 referring to Farley v. Skinner,  4 All E.R. 801 (ILL).
46 Ibid., paragraph 41 referring to Prinzo v. Baycrest Centre for Geriatric Case (2002) CanI AI 45005 (Ont C.A.), (2002), 60 O.R. (3d) 474.
47 Fidler, supra, paragraph 45.
48 Fidler, Ibid., paragraph 54.