Nova Scotia Court Of Appeal Substantially Reduces Punitive Damages In LTD Case (Plus A Primer On The New Nova Scotia Limitations Act)

PART I: THE NSCA DECISION IN BRINE

"Disability insurance is a peace of mind contract": that's the opening line of the Nova Scotia Court of Appeal's long-awaited decision in Industrial Alliance Insurance and Financial Services Inc v Brine1. The Court of Appeal agreed with the trial judge that the Insurer had committed several breaches of its duty of good faith, but drastically decreased the amounts of damages for mental distress and punitive damages (see our previous client update on the trial decision).

Facts

The Insured had begun receiving benefits under his employer's long-term disability policy in 1995 after a diagnosis of depression. The Insurer brought an action claiming (in part) an overpayment, as a result of the Insured receiving certain retroactive disability pension benefits. The Court of Appeal agreed with the trial judge that the Insurer breached the Policy when it clawed back the overpayment instead of pro-rating it in accordance with the Policy wording.

In addition, the Court of Appeal agreed the Insurer breached its duty of good faith in the way it handled the Insured's LTD claim. It had disregarded a Tax Court ruling that the LTD benefits were non-taxable, and failed to disclose an IME.

More importantly, the Court of Appeal agreed with the trial judge's findings that the Insurer had improperly discontinued rehabilitation services. The Insurer had disregarded medical evidence that rehabilitation could help the Insured return to work, and assumed that because he had qualified for CPP disability benefits he would never return to work. This was bad faith even though the Policy did not require the Insurer to provide rehabilitation. Once the Insurer decided to provide these services it had to continue them, and communicate about them, in good faith.

Damages

Damages for mental distress: Reduced from $180,000 to $90,0002

The Court of Appeal reviewed damages awards across Canada and noted $75,000 was the highest amount awarded "for mental distress in the insurance context" - until this case. The Court of Appeal reduced the trial judge's amount by half, to $90,000, but it is still the highest-ever damages award in Canada in this context.

Punitive damages: Reduced from $500,000 to $60,000

Both the trial judge and Court of Appeal were keenly aware that punitive damages are only awarded against Insurers in exceptional cases. The trial judge had awarded $500,000 in punitive damages. The Court of Appeal noted that "only a few" prior awards...