In Industrial Alliance Insurance and Financial Services Inc. v. Brine, 2014 NSSC 219, National Life (and later its successor Industrial Alliance) alleged Brine had received undisclosed CPP and Superannuation disability benefits resulting in a substantial overpayment of $99,506.64. Brine had also commenced a human rights complaint against his employer for discrimination on the basis of disability, and received a $300,000 settlement which National Life also claimed via subrogation. By way of Counterclaim, Brine pled the insurer had breached its contractual duties and acted in bad faith. Both parties agreed that Brine remained disabled up to the date of trial.

Clawback or prorate the overpayment?

National Life set-off the overpayment by reducing Brine’s monthly disability payments to $0. Brine submitted based on the wording of the Policy, the retroactive payments should have been prorated over the life of the Policy and not clawed back upfront. Justice Bourgeois noted the Policy did not clearly differentiate between retroactive versus future lump sum income payments, and pointed out that National Life had subsequently amended the Policy wording. She held National Life was not entitled to undertake a complete clawback of disability payments, and that the overpayment should have been prorated.

Furthermore, Justice Bourgeois rejected National Life’s argument that Brine was a fiduciary who had misappropriated funds by failing to notify National Life of the overpayment, and found that Brine’s bankruptcy had wiped out the overpayment.

Breach of the duty of utmost good faith

Justice Bourgeois found that National Life’s interpretation of the set-off provision was not unreasonable or arbitrary in light of the wording.

Early in the claim, National Life arranged discretionary rehabilitation services in an effort to return Brine to employment, but discontinued the services because the medical information on file demonstrated Brine was not capable of returning to work. Although Justice Bourgeois agreed that National Life was not obligated to offer rehabilitation services under the Policy, she held that once those services were implemented, National Life could not escape its obligation to manage in good faith the provision of this benefit. Further, National Life had acted on outdated medical information, had not considered the impact of stopping rehabilitation once it had been started, and did not contact Brine to advise such services were ending.

National Life continued to issue T4 slips to Brine which characterized his disability benefits as taxable income despite Tax Court rulings to the contrary. Justice Bourgeois held National Life was required to either implement the Tax Court decisions or meaningfully consider the rulings.

Justice Bourgeois also chastised National Life for failing to disclose an IME (without any explanation) until the week prior to trial and inferred that National Life had purposely withheld the IME to obtain a better bargaining position. Justice Bourgeois further found that neither of National Life’s witnesses was credible. She concluded one of the National Life witnesses during her direct testimony had wantonly disregarded the evidence from its own file that Brine had advised National Life he had applied for CPP and was pursuing the human rights complaint, and had purposely painted Brine in a negative light to reinforce National Life’s position.

The Damages

Brine argued that he should be awarded past and future loss of income because, had rehabilitation services not been discontinued, he would have likely returned to work. Justice Bourgeois found that given Brine’s longstanding illness, she was not certain rehabilitation services would have been successful and declined the claim for loss of income. She also found that because the human rights settlement was characterized primarily as loss of income, National Life was entitled to subrogation. However, since the majority of the settlement was to the benefit of National Life, the subrogation amount awarded to National Life should be net of the legal fees paid by Brine.

Justice Bourgeois ordered National Life pay approximately $62,000 to Brine, representing the overpayment amount which should have been expunged by his bankruptcy. Justice Bourgeois awarded $30,000 in general damages for mental distress and $150,000 in aggravated damages, noting the impacts of National Life’s bad faith had extended from its suspension of rehabilitation benefits to the week before trial when it had disclosed the IME.

In awarding $500,000 in punitive damages, Justice Bourgeois noted there were several aspects of National Life’s conduct deserving of censure. It had grossly mishandled its duty to fairly consider and assess the provision of rehabilitation services, had failed to disclose the IME, had failed to implement the findings of the Tax Court, and one of its witnesses had demonstrated a wanton disregard for the accuracy of her trial testimony.

Lessons Learned

Well-documented communication with an insured and their treatment providers, including appropriate follow-up, is necessary to demonstrate that an insurer is meeting its duty of utmost good faith. Furthermore, decision makers should rely on current information in making decisions, and should notify insureds of their decisions and reasons for same. Once discretionary services like rehabilitation are offered, insurers must apply the same standard of care in discontinuing such services.

Although Stewart McKelvey was not involved in this case, if you would like to discuss the implications of this lengthy 166 page decision in greater detail or would like advice on avoiding bad faith damages, please contact Steve Hutchison, Patricia Mitchell, Michelle Chai or the other members of the Stewart McKelvey Life & Disability Insurance Practice Group.