Indemnification For Legal Costs Awarded When Disability Coverage Denied

In the recent case of Tanious v. The Empire Life Insurance Company, 2017 BCSC 85, the British Columbia Supreme Court awarded special costs equivalent to full indemnification of the plaintiff's litigation costs in a disability insurance action. The plaintiff was initially diagnosed with multiple sclerosis ("MS") in 2002 at the age of 25. Her condition progressed to the point that in 2011, her family physician provided a report stating her medical condition would prevent her from working. The plaintiff was subsequently terminated from her employment. In 2012, the defendant advised her that it had rejected her disability claim and later refused to pay long-term disability benefits.

In the underlying action, the Court concluded that the plaintiff was totally disabled by MS under the terms of her disability insurance policy issued by the defendant and would continue to be disabled in the future. The Court allowed her action for long-term disability benefits and also awarded $15,000 in aggravated damages for mental distress caused by the defendant insurer's refusal to pay benefits. Of note, the action did not involve a "bad faith" claim against the insurer.

The plaintiff sought special costs in the nature of full indemnification of her costs of litigation. She did not claim reprehensible conduct on the part of the insurer, but instead argued that such costs were merited on the basis that disability insurance claims involve unique considerations. The defendant in turn argued that there was no legal authority for the court to award full indemnification in these circumstances and submitted that the plaintiff was seeking a novel costs order.

The Court reviewed case law where plaintiffs have been awarded full indemnification for costs in an action against their insurer. The Court divided these cases into four basic classes of claims by an insured against his or her insurer:

cases in which the insured incurred legal costs to determine coverage under the contract; cases in which courts found full indemnity of legal costs was necessary to give effect to the fundamental purpose of the contract and to secure justice; cases in which full indemnity costs were awarded in addition to punitive damages; and cases in which legal costs were treated as damages which were foreseeably incurred in mitigation of the insured's losses. The court recognized that disability insurance claims have unique characteristics that distinguish them from other personal harm cases...