Canada Insurance Lawyer & Attorney : Michael Thomas of Harper Grey Law Firm : British Columbia, Vancouver

Fidler worked as a bank receptionist and was covered by a group policy that included long-term disability benefits. At the age of 36, she became ill and was eventually diagnosed with chronic fatigue syndrome and fibromyalgia and began receiving long-term disability benefits in January 1991. Under the terms of the policy, Fidler was entitled to continued benefits after two years only if she was unable to do any job. In May 1997, Sun Life informed Fidler that her benefit payments would be terminated and indicated that it had conducted video surveillance of Fidler detailing activities inconsistent with Fidler’s claim that she was incapable of performing light or sedentary work. Sun Life’s denial of benefits was followed by almost two years of correspondence with Fidler and medical professionals. Sun Life received medical evidence to the effect that Fidler was not yet capable of doing any work. However, Sun Life elected to rely on its own consultants and experts and confirmed its decision to terminate benefits in December 1998. Fidler then commenced an action and, one week before trial, Sun Life offered to reinstate Fidler’s benefits and to pay all arrears with interest. The only issue to proceed at trial was Fidler’s entitlement to damages.

At trial, the trial judge awarded Fidler $20,000 in aggravated damages for mental distress, but refused to make a punitive damages award against Sun Life finding that Sun Life had not acted in bad faith. On appeal, the Court of Appeal unanimously upheld the award for mental distress and a majority of the Court awarded Fidler an additional $100,000 in punitive damages finding that the trial judge had made a palpable and overriding error on the question of bad faith. Sun Life appealed this decision.

The Supreme Court of Canada held that damages for mental distress for breach of contract may be recovered where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time the contract was made. There is no requirement for an independent actionable wrong. In order to be successful, a plaintiff must prove his or her loss and the Court must be satisfied that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. In this case, given the nature of a disability insurance contract, it would have been within the reasonable contemplation of the parties at the time the contract was made that mental distress would likely flow from a failure to pay the required benefits. The mental distress at issue here was of a degree sufficient to warrant compensation and the trial judge’s award of $20,000 in aggravated damages to compensate Fidler for the psychological consequences of Sun Life’s breach of contract was upheld.

The Supreme Court of Canada set aside the Court of Appeal’s award of punitive damages. The Court noted that punitive damages are not compensatory and are designed to address the purposes of retribution, deterrence and denunciation. However, an insurer will not necessarily be liable for such damages by incorrectly denying a claim that is eventually conceded, or judicially determined, to be legitimate. The question in each case is whether the denial was a result of the overwhelmingly inadequate handling of the claim, or the introduction of improper consideration into the claim’s process. In this case, the trial judge had reviewed the evidence thoroughly and found that Sun Life had not acted in bad faith. The conduct of Sun Life in its consideration of the matter was troubling but not sufficiently so as to justify interfering with the trial judge’s conclusion that there was no bad faith.

This was a claim by the Jesuit Fathers of Upper Canada ("Jesuits") against their Insurer Guardian Insurance Co. of Canada ("Guardian"). The Jesuits claimed that Guardian had a duty to defend them pursuant to the terms of a CGL policy in actions alleging sexual abuse at the Indian Residential School which they had administered until 1958.

The Jesuits purchased an annual CGL policy from Guardian in 1988. By January 1994, the Jesuits became aware of allegations of abuse of students at the school. Counsel for one of the students, Mr. Cooper, informed the Jesuits by letter dated January 27, 1994 of his client’s claim detailing physical and sexual abuse. Counsel for the Insureds wrote to the Insurer on March 18, 1994 to raise the possibility that the Jesuits might be facing other claims in the near future. The letter identified the nature of the possible claims and the names of Mr. Cooper, in addition to nine other victims. As a result, the Insurer refused to renew the policy beyond September 30, 1994 after which numerous additional claims alleging similar allegations were made. With the exception of Mr. Cooper’s claim, the Insurer refused to defend any claims arising from the operation of the School because they were only "first made" after the expiry of the policy and were not covered by the policy.

The trial judge construed the insurance contract as a claims-made policy and found that Mr. Cooper’s claims and the claims on behalf of the nine victims mentioned in the March 18, 1994 letter to the Insurer fell within the temporal limit of the policy and that the Insurer had a duty to defend against them. The Court of Appeal upheld the decision.

The Supreme Court of Canada dismissed the appeal but found that except for Mr. Cooper’s claim, the Insurer had no duty to defend the actions against the Jesuits resulting from the administration of the school. This was a claims-made policy and the occurrence based elements of the policy did not expand the coverage available. The clause limiting the scope of the insurance coverage suggested that a claim must be actively made as opposed to merely being discovered. This interpretation of the word "claim" was consistent not only with the wording of the policy, which distinguished between an "occurrence or circumstance" and a "claim", but also with the definition of "claim" under the common law, which requires a third party to communicate an intention to hold the insured responsible for damages. While a third party may communicate this intention through a representative, the key is that the representative be accurately communicating the intent of the claim and that this be done with the claimant’s full knowledge and approval.

Except in the case of Mr. Cooper, there was no intention communicated by former students or their representative during the policy period to hold the Insured responsible for damages and, as a result, the Insurer did not have a duty to defend the actions. The trial judge erred in concluding that there were claims made by the other nine individuals named in the March 18, 1994 letter to the Insurer because nothing in the records suggested that the person who gave the names of these individuals to the Jesuits’ investigator had the permission of these individuals to communicate an intention to hold the Jesuits responsible for injuries suffered at the School.

The insureds’ house was destroyed by a fire. At that time, the house was vacant because the insureds had earlier defaulted on their mortgages with the mortgagees. The mortgagees made an insurance claim pursuant to the standard mortgage clause in the policy. The insurer denied the claim because it had not been informed of the vacancy of the house. The insurer took the position that the vacancy was a "change material to the risk and within the control and knowledge" of the mortgagees. The insurer claimed that under statutory condition 4, it was entitled to void coverage. The Ontario Superior Court of Justice found that statutory condition 4 did not apply. The Court of Appeal set aside the decision and granted judgment in favour of the insurer.

The Supreme Court of Canada allowed the appeal and held that the insurer could not rely on statutory condition 4 to void coverage. Under statutory condition 4, any change material to the risk and within the control and knowledge of the insured voided the contract unless the insurer was promptly notified in writing of the change. The Supreme Court of Canada held that statutory condition 4 conflicted with the mortgage clause which provided that the terms of the mortgage clause "shall supersede any policy provisions and conflict therewith but only to the interest of the mortgagee". The mortgage clause specifically provided that the insurance "is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, including transfer of interest, any vacancy or non-vacancy". The Court held that the insurer was not entitled to rely on the statutory condition to void coverage.

The Plaintiff was seriously injured in a car accident and received long-term disability benefits pursuant to her employer’s insurance policy. After receiving benefits for eight years, the insurer terminated the benefits. The Plaintiff sued, and the parties settled for $105,000 and a release in which the insurer denied all liability. One portion of the lump sum settlement was intended to compensate for benefits arrears owing at the time of the settlement.

The court considered the surrogatum principle, a factual enquiry into the nature and purpose of the settlement payment for taxation purposes, to determine what funds it is intended to replace. Writing for the 4-3 majority, Charron JJ. held that the portion of the settlement intended to compensate for past benefits was indeed taxable within the meaning of section 6(1)(f) of the Income Tax Act. The taxability of settlement funds will depend upon the nature of the settled interest. The issues are: first, what was the settlement amount intended to replace? Second, would the replaced amount have been taxable in the recipient’s hands? Settlement funds received on account of non-pecuniary damages, for example, would not be taxable. Because part of the settlement monies were intended to replace past disability payments, and such payments, had they been paid to the Plaintiff originally, would have been taxable under section 6(1)(f) of the Act, the settlement amount was held to be similarly taxable.

In dissent, Abella JJ. for the minority would have held that the entire settlement was tax exempt. She therefore opined that the settlement was not made "pursuant to a disability insurance plan" and absent a contrary statutory provision, the legal realities of a transaction should be respected for tax purposes. The settlement resulted from a court action, therefore, the amount was paid to avoid a judicial determination of what amounts were owing under the policy. The sum was paid not as disability benefits but to extinguish any liability for claims. To interpret the payment as "pursuant to a policy" necessitates a recharacterization of the settlement, a manipulation of the legal realities of the transaction.

The owners of a family home converted it to apartments and then left Cape Breton to find work in British Columbia. While the owners were out of the jurisdiction, the house was vacant. It was then occupied for a short time, after which it was destroyed entirely by fire. The insurer, Halifax, denied the claim for fire loss on the basis that the owners had breached statutory condition 4 under Nova Scotia’s Insurance Act, R.S.N.S. 1989 c. 231, which states that undisclosed change material to the risk at issue invalidated coverage.

At trial, the court assumed that the owners breached the statutory condition, however held they should be relieved from the consequent invalidation under section 171 of the Act. Section 171 states that a policy condition is not binding on the insured if a court holds it to be "unjust or unreasonable". The court reversed the decision on appeal, on the ground that section 171 did not apply to statutory conditions, but only to contractual conditions in the specific policy.

McLachlin C.J., writing for the majority, analyzed the case first by determining whether section 171 applied to statutory conditions, and then determining whether there in fact had been a statutory breach. The intention of section 171 was not only to delete conditions that are unreasonable on their face, but also to relieve against the results of applying conditions that are "draconian in their consequences". She held, then, that the intention was remedial, and therefore applied not only to contractual terms but to statutory conditions if they were unjust in their application. She rejected the insurer’s argument for a "plain reading" of the phrase "where a contract ... contains" to mean only contractual terms, holding that statutory conditions are also contained in the contract and therefore are included. The court also rejected the insurer’s argument that another section of the Act specifically refers to "statutory conditions" while section 171 does not, holding that the sections had different legislative histories and therefore the use of the term "statutory condition" in one section but not the other was not determinative.

The court went on to consider whether the prior vacancy was indeed a "change material to the risk". It is well-established in insurance law that vacancy can be a change material to the risk of fire; however, there was no concrete evidence linking the earlier vacancy to the actual circumstances of the fire. Case law establishes that a statutory breach need not be causally connected to the loss in order to invalidate the contract, although the court held that the present case was distinguishable because the vacancy had been rectified and was not in play at the time of the loss. The court pointed out that many events can temporarily change risks relevant to home insurance and questioned whether homeowners are obliged, at the risk of losing coverage, to advise insurers of these temporary problems, even after they had been rectified.

The court declined to decide whether the statutory condition was in fact breached, holding that "arguments can be put for and against the proposition ... on these facts". The issue should be resolved by legislative amendment or in another case.