Howard Levitt and Rob Lilly 

In the fall, we wrote about the largest punitive damages award against a disability insurer in Canadian history. In Sara Baker v. Blue Cross Life Insurance Company of Canada, the jury awarded an unprecedented $1,500,000 in punitive damages to Baker. Blue Cross appealed that figure, with many questioning whether it would be upheld.

In late December, we got the answer when the Ontario Court of Appeal confirmed the award. In addition to setting the high-water mark for punitive damages against a disability insurer, the decision also elucidates the underlying facts justifying the amount. Because juries do not give reasons for their verdicts (unlike judges who provide written reasons), we had little insight into the jury’s rationale. 

Recall that Baker could not work as director of a Toronto hospital after suffering a stroke/brain bleed. Blue Cross initially approved her long-term disability claim, but later discontinued benefits alleging she could work in a lower-paying job. Not persuaded, the jury awarded ongoing disability benefits, plus mental distress damages and, of course, punitive damages. 

Punitive damages are designed to punish, denounce and deter. They are reserved for conduct that is malicious, oppressive or high-handed and that typically offends the court’s sense of decency. 

A panel of three judges considered if the evidence rationally supported not just an award of punitive damages, but one of that magnitude. Blue Cross argued that punitive damages were inappropriate — asserting that while it reached the wrong conclusion, it did so in good faith, not maliciously. Indeed, simply making an incorrect legal conclusion does not alone warrant punitive damages. To accept the insurer’s theory, the jury “would have had to ignore the coincidence that every time Blue Cross erred in handling (Baker’s) file, it was to her detriment and to the benefit of Blue Cross,” the court wrote.

The court listed seven different examples of misconduct to support the jury’s decision. Blue Cross outright ignored information, misinterpreted its own experts’ reports and relied on misinformed advice of its doctors to terminate benefits. This pattern “at best, shows reckless indifference to its duty to consider (Baker’s) claim in good faith and conduct a good faith investigation, and at worst, demonstrates a deliberate strategy to wrongfully deny her benefits, regardless of the evidence that demonstrated an entitlement,” the court wrote.

The misconduct was “systemic” going beyond a rogue examiner, but rather involving many employees using the same strategy to ignore Baker’s rights. The evidence, according to the court, suggested there may be many other claimants who were treated in the same manner but lacked the fortitude to pursue Blue Cross to trial. 

The court satisfied itself of ample evidence warranting punitive damages, but how did it justify such a large amount? Three words: deterrence, vulnerability and profits. Disability policies provide peace-of-mind to vulnerable individuals who are dependent on their insurers for income when illness strikes. Deterrence, therefore, is paramount in claims against insurance companies who act badly, something the court elaborated on in upholding the quantum.

“Deterrence is impossible unless the punishment is meaningful,” Justice C. William Hourigan wrote in the decision. “I take judicial notice of the fact that Blue Cross is a large insurance corporation. While a punitive damages award of $1.5 million might be devastating to a personal defendant or a small business, it is little more than a rounding error for Blue Cross. Indeed, it is difficult to envision how an award of anything less than $1.5 million would even garner the attention of senior executives, let alone deter future misconduct.”

Historically, appeal courts have reduced larger punitive damages awards in disability cases. In Industrial Alliance Insurance and Financial Services Inc. v. Brine, the same claims manager was involved in mishandling a previous disability case, which resulted in a $7,500 punitive damages award two decades earlier. The trial judge ordered $500,000 in punitive damage. He noted that the prior punitive damages award against insurer of the recidivist claims manager did not “teach (the insurer) a lesson.” The Nova Scotia Court of Appeal reduced the award to $60,000 as more proportionate to punitive damages objectives. In Braco v. American Home and Zurich Life, the Saskatchewan Court of Appeal reduced the punitive damages awards of $3 million and $1.5 million against Zurich and American Home to $500,000 and $175,000, respectively, for similar reasons.