Branco v. American Home Assurance Co., 2013 SKQB 98

In a decision that came down on March 21, 2013, Justice Acton of the Saskatchewan Queen’s Bench found the Defendants American Home Assurance Company (“AIG”) and Zurich Life Insurance Company Ltd. (“Zurich”) liable to the Plaintiff, Luciano Branco, for breaching their duties of good faith and fair dealing. Justice Acton awarded the Plaintiff a total of $450,000 in aggravated damages and $4.5 million in punitive damages, the largest bad faith punitive damages award in Canadian history. In doing so, Justice Acton called on the insurance industry as a whole to “recognize the destruction and devastation that their actions cause in failing to honour their contractual policy commitments to the individuals insured.”

The Plaintiff was a welder. He was born in Portugal and immigrated to Canada as a young man. Years later, after becoming a Canadian citizen, he returned to Portugal to live and took a job in a mine in Kyrgyzstan. In the course of his duties, he dropped a steel plate on his foot and, a month later, re-injured it when he stepped on a piece of steel. As a result, he was permanently disabled.

AIG was the Plaintiff’s workers’ compensation provider and Zurich was his long term disability insurance provider. The court found that both of these insurers took deliberate steps to deny coverage to the Plaintiff in order to create undue hardship on him to force him into accepting an extremely low offer of settlement. Although both insurance companies admitted that they owed coverage to the Plaintiff, AIG paid out sporadically and, on occasion, stopped paying out entirely without explanation or justification, and Zurich refused to pay anything at all for eight years.

As a result of AIG and Zurich’s refusal to pay benefits, the Plaintiff and his family were without funds for many years. The total lack of income caused the Plaintiff severe mental stress and disabled him further. He was ashamed that he was unable to support himself and his family, which went to the root of his personal self-worth and integrity.

Both insurers eventually did pay out, on the eve of trial, and included interest payments and costs, but the court found that this was not sufficient. At paragraph 145, the court found that “to fail to make the payments in a prompt and reasonable manner was a breach of duty of good faith and fair dealing … to fail to pay the disabled individual for months or years on end and then provide a lump-sum payment with interest to date totally defeats the purpose of the policy”.

In assessing aggravated damages, Justice Acton found that the workers’ compensation coverage provided by AIG and the long term disability insurance provided by Zurich were both peace of mind contracts, for which aggravated damages are permissible, and assessed $150,000 against AIG and $300,000 against Zurich.

In assessing punitive damages, the court looked at past bad faith awards and found that they had been insufficient to catch the insurance industry’s collective attention. In fact, a bad faith penalty had been levied against AIG for the exact same reason in 2003, in a claim involving the same adjuster that was responsible for the claim in the case at hand. The court found that the $60,000 award in that previous case had done nothing to deter AIG and its adjuster.

The court also considered Whiten v. Pilot Insurance Co., 2002 SCC 18, which resulted in punitive damages of $1 million after similar tactics by Pilot Insurance Co. over a two-year period of time. The Court noted, however, that in Whiten, there was no evidence to prove a deliberate corporate strategy at Pilot, as opposed to an isolated mishandled file that ran amuck. Here, the Court found such a strategy undertaken over a much longer time period. The court noted that the $1 million in punitive damages awarded in Whiten in 1996 was the equivalent of $1,368,539.33 in 2012, and assessed punitive damages against AIG in the amount of $1,500,000.

In calculating punitive damages against Zurich, the Court considered that

for every individual who could not withstand these types of actions by Zurich in similar situations as Branco, Zurich or other insurance companies would profit by approximately one-half of a million dollars in each case they could settle on an unjustifiably low offer after two or three years of financial and psychological pressure. This is calculated based on the fact that if Branco had been unable to withstand the financial and emotional pressure when Zurich made its first offer of settlement when it was deducting the $9,000 in legal fees, Zurich would have saved more than $500,000 which has been paid on this claim since that date.(at 210)

The Court therefore assessed punitive damages against Zurich in the amount of $3,000,000.

In conclusion, Justice Acton noted,

the cruel and malicious acts of AIG and Zurich combined with the previously ignored award of punitive damages against AIG is evidence of how calculated and abhorrent the actions of AIG were in dealing with Branco. The actions of AIG and Zurich establish a pattern of abuse of an individual suffering from financial and emotional vulnerability (at 214).

He commended the Plaintiff for being able to continue to withstand this pressure for so many years from two different fronts, and expressed concern for the individuals without the Plaintiff’s strength, who give in to such financial and psychological pressures.

While this decision will almost certainly be appealed, it is important to keep in mind that punitive damages for bad faith can be significant. Claims should be handled by claims professionals and according to company policy, and legitimate claims are not to be used as the starting point for a negotiated settlement. Further, lump sum payments of benefits that are meant to be provided monthly are not acceptable, even with interest. Legitimate claims must be handled fairly and promptly, without undue hardship to the insured.

Prepared by former associate Lindsey Williams.