A claim for punitive damages is not a claim for disability benefits and can be pursued in a lawsuit separately to punish an insurance company for bad faith conduct.  In the recent decision, Fernandes v. Penncorp Life Insurance Company, the Court of Appeal affirmed the Trial Judge’s decision awarding $200,000 in punitive damages, as the Appellant, Penncorp’s conduct met the test for punitive damages as being “highhanded, malicious, arbitrary or highly reprehensible conduct”.

The Respondent, Fernandes, suffered a serious back injury after falling off a scaffold and two days later falling off a trailer.  Following the two accidents, he was unable to work as a self-employed bricklayer.  He claimed disability benefits from Penncorp who accepted Fernandes as totally disabled and paid him a monthly benefit for approximately seven months.  Penncorp subsequently terminated Fernandes’ benefits, contrary to the medical evidence.  Penncorp failed to formerly advise Fernandes of the termination of his benefits until about five months after the fact. It simply stopped sending the disability benefit cheques.

Penncorp relied solely on surveillance that showed Fernandes doing some work around the house, which included shovelling, pushing a wheelbarrow, and lifting the wheelbarrow and a wooden skid into the back of a trailer.  This surveillance was not inconsistent with Fernandes’ evidence that he did some limited housekeeping activities.

The Court of Appeal upheld the trial judge’s decision awarding $200,000 in punitive damages.  The trial judge concluded that the Defendant breached its insurance contract with the Plaintiff to pay disability benefits and its duty of good faith.  Having reviewed the evidence, the trial judge concluded that Fernandes continued to suffer from a total disability contained in the insurance policy, i.e. he was unable to perform substantially all of the duties of his occupation and he was disabled from any occupation for which he was reasonably suited for by education, training or experience.

In addition, Penncorp had not dealt with Fernandes in a fair and balanced manner.  Instead, Penncorp took an adversarial approach to Fernandes’ claim and terminated his benefits in the face of medical evidence to the contrary and on the basis of surveillance that did not reasonably support the decision to terminate benefits.

The Court of Appeal, however, reduced the damages for aggravated damages (mental distress) from $100,000 to $25,000 as this award was inordinately high and entirely disproportionate and there was evidence that circumstances apart from Penncorp’s conduct contributed to Fernandes’ psychological distress.

Unfortunately, insurance companies frequently unfairly deny payment of disability claims.  This case, however, can be used as a powerful tool to ensure insurance companies comply with their duty of good faith. The prospect of high punitive damages awards can affect the way in which insurance companies approach claims.